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A New Frontier for Fixed Mortgage Rates

—The Mortgage Report: Aug 21—

Boldly Going Where No 5-Year Fixed Rate Has Gone Before

  • For the first time, pricing on Canada’s most in-demand term is now effectively as low as 1.59%. That’s for default-insured 5-year fixed mortgages in Ontario. Consider that just 18 months ago rates were double what we see today.
  • On the uninsured side, we’re getting multiple big-bank reports of 1.95% or less for super-prime customers. Although 1.99% and 2.04% are more common. Here are conservative estimates of the latest big bank discretionary mortgage rates.
  • Interestingly, the gap between fixed and variable remains ultra-tight at less than 10 basis points in most cases. But now, for the first time in months, we’re seeing a noticeable uptick in variable-rate applications. That’s explained by what follows.

Variable Discounts Return with a Vengeance

  • Well, that was fast. As many recall, banks erased discounts from prime rate on floating-rate mortgages this spring. Now, the lowest insured rates are back to prime – 0.92%, a stunningly fast turnaround for a recession. We have the Bank of Canada, CMHC and Department of Finance to thank for that, as their pandemic liquidity support measures brought funding costs back down lickety-split.
  • For all refinancers, competitive uninsured mortgages are still stuck in the prime – 0.60% range. Although you might be able to squeeze a bank for a little better if your mortgage is big enough.

Record Low Non-Prime Rates

  • Deals on non-prime mortgages are the best they’ve ever been, according to RateSpy’s records. If your debt ratios are a bit stretched, your credit is below average or you’re having trouble proving income in the normal way, you can now find non-promotional 1- and 2-year fixed rates under 3% for the first time, thanks to Equitable Bank’s new 2.99% offer.
  • “This rate has never occurred before with an institutional lender,” says prominent broker Ron Butler of Butler Mortgage. “The Product / Pricing SVP at [a competing lender] emailed me this morning [saying], ‘Ron, is this 2.99% thing frigging true??'”
  • As with most non-prime rates, a lender fee (1%) applies in this case.

Higher Delinquencies Next Year

  • “We believe recent extensions and amendments of government programs (combined with deferrals and a slightly better-than-expected economic recovery) will…likely [push] the peak of [mortgage] impairments into mid-2021,” says RBC Capital Markets analyst Darko Mihelic (via BNN Bloomberg).

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  • Yeda says:

    Does anyone have a good guess for how low 5 year fixed rates could go?

  • Bruce says:

    How low will interest rates go for a 5 year fixed mortgage??

  • The Spy says:

    Hi Yeda and Bruce,

    For a useful guesstimate, you’ll need to:

    a) Predict how low Canada’s 5-year bond yield will go


    Note: The consensus economist forecast is for an incline in yields starting in 2021 and running through 2025. That means little, of course, given economists are blind about what happens next month, let alone next year. About all we can say is that there’s at least a 25-35% chance yields make news lows and drop near/to zero sometime in the next year.

    b) Tack 150 bps on top of that 5yr yield estimate

    Example: If the 5yr yield falls to 0%, 1.50% uninsured 5yr fixed rates are easily in the realm of possibility.

    c) Predict roughly when yields will hit your estimated level…

    …and then you have your answer.

  • Matt says:

    Looking at 5 year terms 1.84% fixed or 1.59% Variable, I have a smaller principle and am aiming to be aggressive paying it off, thinking that the BoC is not likely to increase rates anytime soon, do you think it’s likely they could drop to 0%, the fixed vs variable debate what side do you come out on?

    • The Spy says:

      Hi Matt, The BoC has publicly repeated several times that its key rate is at the “effective lower bound.” Anything’s possible — and it wouldn’t shock me — but the odds suggest we won’t see a 0% overnight rate in this rate cycle. We very well could see years at 0.25%, however.

  • Chris says:

    Got offered 1.85% for 5 year variable from BMO…I’m expecting a lump sum payment in few years hence I don’t want to go fixed and end up paying hight penalties. Any thoughts on strategy and rate ofdered.?

    • The Spy says:

      Hey Chris, I prefer HSBC’s variable over BMO’s because HSBC’s is fully open after 36 months. That lets you pay it off when you get your cash with no penalty.

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