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Bank of Canada Re-Signals a Long Road to Recovery

Quick Rundown

  • Today’s Announcement: No change to rates
  • Overnight rate: 0.25%
  • Prime Rate2.45% (also no change; see Prime Rate)
  • Market Rate Forecast: No BoC hikes until at least 2023
  • BoC’s Headline Quote: “The Governing Council will hold the policy interest rate at the effective lower bound [intended to be 0.25%] until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”
  • BoC on the Economy: “CPI inflation is close to zero…The bounce-back in [economic] activity in the third quarter looks to be faster than anticipated…The Bank continues to expect [a] strong reopening phase to be followed by a protracted and uneven recuperation phase, which will be heavily reliant on policy support.”
  • BoC’s Full Statement: Click here
  • Next Rate Meeting: October 28, 2020

The Spy’s Take

  • As we write this, Canada’s bellwether 5-year bond is almost unchanged, indicating the BoC’s announcement today did not alter market expectations for future rates.
  • Canadian rates will continue to hinge not only on our domestic data, but more importantly on changes in global rates and central bank expectations (mainly the U.S. Fed), which aren’t likely to change significantly this year.
  • It seems likely that March’s 150 bps of rate cuts is all we’re going to get. The median economist forecast, tracked by Bloomberg, is for Canada’s key lending rate to stick at 0.25% through 2022, in keeping with the Bank’s own quarterly forecasts.
  • The Bank keeps snapping up $5 billion of government bonds each week, helping suppress fixed mortgage rates. That “will continue until the recovery is well underway,” the Bank says, probably till next year. That suggests fixed mortgage rates will remain near historic lows for several weeks (at least).
  • The virus outlook continues to guide the Bank’s hand. At some point, COVID treatments and vaccines will make headlines and optimism will return in force. That’s on top of fiscal stimulus, more of which is sure to come (likely during the Prime Minister’s throne speech on Sept. 23). Does the economy then recover a year from now, two years, or more? It’s impossible to time. When it does happen, bond traders will get spooked and yields (and hence, fixed mortgage rates) will climb.
  • In the meantime, the Bank is more worried about downside risks to the economy and inflation than a surprise rebound. Analysts say that should keep rates relatively low into 2021.

How to Play It

  • Four months ago we wrote that 0.60% is a magic number for the 5-year bond yield. That remains the case today. So long as we don’t shoot above that level, fixed mortgage rates should stay near rock-bottom levels.
  • Those already in deep-discount variables (e.g., prime – 0.85%) have no reason to change course.
  • Most folks evaluating terms for a new mortgage continue to see more value in fixed rates, given the small premium to variables. But make no mistake, despite structurally high unemployment, there is extraordinary leverage and rising risk in the bond market. That’s thanks to unimaginably massive government borrowing. When the time comes, traders will price in this higher risk by selling bonds, which in turn will lift yields (interest rates). This may not happen anytime soon, but it will eventually come home to roost. We suspect many in longer-term fixed rates innately sense this. The overwhelming majority will keep locking in for five years to protect themselves.

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  • Tudor says:

    Thank you for today’s update. Can you please, once in a while, keep updating, like today, what those of us with “deep-discount variables” should be doing and when? I am keeping an eye on the fixed rates, but sometimes it is hard to discern between insured and uninsured without enough info.

  • Jagirdaar says:

    @The Spy:
    We are closing on our first home on Sep 30. Offered 1.78% on Scotia STEP and TD Flexline (+2000 cashback) 5 yr fixed uninsured with atleast 25% down, 575-600k mortgage. Do you think we should sign it or is there room for further reduction? Also, although I don’t see us breaking the mortgage (porting, maybe), would you recommend steering clear of the Big 6 instead?
    Btw, this website has been an incredible resource for mortgage news in this house shopping journey of mine. Kudos to the Rate Spy Team!

    • The Spy says:

      Hi Jagirdaar,
      Thank you for the kind feedback! 5yr fixed rates on 75% LTV purchases are as low as 1.65% (depends on the province). That’s for a standard mortgage at a fair penalty lender that’ll most likely impose a 3-month interest penalty versus a heinous big bank IRD.
      If one needs a HELOC, 30-year amortization and/or good port-and-increase flexibility, however, that Scotia rate is hard to beat.
      I do like how Scotia’s STEP lets borrowers tack on extra borrowing (in case they move and need a bigger loan) at decent enough rates without incurring a penalty. And they give you 90 days to port, which is much better than 30 or less on a deep discount rate like 1.65%.

  • nbf2008 says:

    So the best way is to get a variable rate now and wait until the lowest fixed rate come and switch to fixed rate?

    • The Spy says:

      Hi nbf2008,
      It’s usually not a good idea to take a variable rate with the intention of converting to a fixed rate.
      1) Locking in a variable to a fixed entails a lot of slippage. In other words, the fixed rate that’s offered is often average at best, uncompetitive at worst.
      That’s because the lender knows you have to pay a penalty to get a better 5-year rate elsewhere. (There are a few exceptions, like HSBC which openly advertises competitive rates and lets people out of their variables with no penalty after three years.)
      2) Timing rate conversions is exceedingly difficult for most people to do effectively. Locking in late can be very expensive.
      3) For many, monitoring the rate market constantly for five years is stressful!

  • Tony says:

    Mortgage due next week. 5 year fixed or 5 year variable?? 285000 remaining on my rental property. Presently paying 5 year fix at 2.6%. Thanks

  • Jagirdaar says:

    @The Spy: TD brought its rate down to 1.75% on the Flexline and with the $2000 cashback the effective rate is around 1.67% (used your mortgage comparison tool). They offer 120 days to port. I think I’m going to sign with them. Thanks a lot for your insight. Hoping to not have to break the mortgage early *fingers crossed*

  • Mate says:

    I am at prime -.67 which is 1.78% at RBC on variable for 5 years (started 6 months ago). Should I look to lock in?

  • IW says:

    Record low interest rates. If you a have vested interest in making banks even richer by all means lock in to the first rate offered no negotiation required
    My advice- find a broker, fair penalty lender
    5 yr variable minimum prime -1 otherwise you are leaving money on the table. When rates do eventually start to rise lets say in 2 years. You lock. In. In theory a 7-8 yr lower interest window as opposed to locking in to a 5 yr fix.

  • Brad says:

    IW – What are you even talking about? Prime minus 1% doesn’t exist.

  • P says:


    How are you leaving money on the table when fixed and variable rates are the same?

    How do you know when is the right time to lock in?

  • Joveeee says:

    @The Spy:
    Thanks a lot for the resources, it has been really helpful for me to learn about mortgages!

    I’m closing a property in a few days, my Bank offered me: 1.82% 5 yr float, vs 1.8% 3 year fixed (all for 30 year amortization – new home purchase). I’m debating the pros and cons.

    Prime rate unlikely will increase in the next 2 years, so really the key timing is at 2.5~3 year. If prime starts going up after 2 years, I can convert the variable to fixed, but I know I won’t get the best market fixed rate as bank knows I will need to pay penalty to break my variable contract first.

    If choosing the 3 year fixed, I feel the only advantage is shorter term, at then end of the 3 year term, will have more choices in the market to choose a new lender / term. But lets say overall rates (variable or fixed) start picking up in 2.5 years time, then the 3 year fixed option will lose its advantage vs a 5 year float right? Either converting the float to fixed or wait after 3 years fixed term to shop again, I will be in the middle of the rising rate environment.

    Not sure which one is better or any other considerations (other than penalty). Any advice is appreciated, thanks!

  • Zack says:

    Hi, scotia offered me a 4 years fixed rate at 1.69% and TD offered 5 years fixed at 1.84% (cash back of $1000) which one is the better option?

    • The Spy says:

      Hi Zack, Four year terms give you more flexibility to refinance earlier without penalties. That may or may not matter to you but most people refi or break in roughly 3.75 years on average. Cash back aside, renewal rates would have to be 85+ basis points higher in year five for you to lose on a 4-year, based on straight interest cost alone. TD mortgages are all collateral charges as well. Scotia still has a standard charge option.

  • Zack says:

    Thank you for your reply. Just to clarify, when you said “renewal rates would have to be 85+ basis points higher in year five for you to lose on a 4-year, based on straight interest cost alone.”, do you mean that the interest rates will be higher in 5 years vs. 4 years? Is the 85+ BP the difference between 5 vs. 4 years as well? For the standard vs. collateral charges, I just noticed that Scotia wrote collateral mortgage in my agreement. Thanks for brining that up! I will try to discuss it with them and see if they can switch it to the standard option. Thank you!

    • The Spy says:

      Hey Zack,
      That was simple hypothetical that compared a 4yr and 5yr over a 5 year span.
      What I meant was: If you have a 1.69% 4yr for example, your renewal rate for year #5 would have to be 2.54%+ (85 bps higher) for you to have saved money in a 5-year fixed.
      Again, this assumes no mortgage changes or fees during the terms. It’s based on interest expense alone.

  • Zack says:

    My concern is simply that if the rate is already a lot higher at year 4, then I will lose A LOT more money than whatever I am aiming to save with the lower interest (1.69%).

    So basically securing a lower rate for 5 years gives me an extra year of saving on interest money.
    I am not sure if you have a special formula or knowledge that predicts the rates at 5 years to be A LOT higher than the ones at 4 years.

    Please let me know your thoughts on this and thank you so much,

    • The Spy says:

      Hey Zack, No one in the world has a special formula or knowledge that (accurately) predicts rates 5 years out. And if they did, they probably wouldn’t tell anyone.

      Rates are cyclical so they’re highly likely to be higher or lower in 48 months. No one can accurately time those cycles so when you’re faced with a very small premium for peace of mind, and peace of mind is valuable to you, pay the piper my friend.

  • Zack says:

    The difference in the premium between the 2 options is 0.23%. I think it isn’t a relatively small difference. Anyway, thanks for your insight and I just commented about “the special formula/knowledge” since you mentioned that the rates at 5 years will be 85bps higher than at 4 years.

    • The Spy says:

      No problem. Small is all relative of course (to the borrower and to historical spreads). And just to clarify, my reply was not that rates would be 85 bps higher. That 85 bps was only the breakeven calculation.
      Good luck…

  • Patience says:

    Hi, I am 3 years into my 5 year fixed rate of 2.89%. If i break today, the penalty is $6500. Mortgage broker says he can get me a 1.64% rate (5 year fixed) if I renew early, but it has a a bonefide sales clause, which makes me a bit uneasy. Just wondering what your thoughts are on this. Would it be wise to change now or hang on for a few more months to see how interest rates change?

    • The Spy says:

      Hi Patience,
      Don’t wait for lower rates because that’s just gambling. You might be right, but you might just as well be wrong and pay more.
      Your broker should be able to tell you if breaking now makes economic sense. It largely depends on your mortgage size.
      Regarding the bona fide sales clause, avoid it if you can find a similar or better rate for an equal or better product elsewhere.
      Only if I could save 15-20 bps on the rate and was sure I wouldn’t need to refinance before maturity would I consider a bona fide sales clause.
      Here’s more info:
      Good luck…

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