BoC Decision: More Impact on 5-year Rates Than Prime Rate

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 until economic slack is absorbed so that the 2% inflation target is sustainably achieved. In our current projection, this does not happen until into 2023.”
  • BoC on the Economy: “…The Bank expects Canada’s economy to grow by almost 4% on average in 2021 and 2022.” (the most since 2007)
  • BoC’s Full Statement: Click here
  • Next Rate Meeting: December 9, 2020

The Spy’s Take

  • This is the first time the Bank has explicitly provided a year (2023) for its next potential rate hike.
    • Many will view this as a promise. It’s not. It’s a “projection” the Bank says, and still subject to change.
    • In essence, “It means that if you’re a household considering making a major purchase,” Governor Tiff Macklem says, “you can be confident that interest rates will be low for a long time.”
  • A second wave of COVID remains the biggest risk, yet the BoC sees 4% GDP growth for the next two years. Canada hasn’t seen that growth rate since 2007. Albeit, until GDP has made up the ground it lost since February (and then some), there is almost zero rate hike potential.
  • Over the next “number of weeks,” the BoC will reduce its bond buying from $5 billion to $4 billion. But, and this is a big “but,” more of its purchases will be 5-year bonds. That’s good news if you’re hoping for lower 5-year fixed rates (since the two are closely correlated).
  • The BoC owns about one in three government bonds. Its continued buying could be the #1 force keeping 5-year rates from rising materially through the first half of 2021.
  • The BoC’s GDP forecasts show it depending much more heavily than normal on housing as an economic saviour in 2021. Hence why it’s trying to keep 5-year yields low — which could in turn keep 5-year fixed mortgage rates cheap for a year or more.
    • Fun fact: “More than 1/4 of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic.”—Monetary Policy Report
  • Macklem said the economic outlook would have to “dramatically” change to warrant negative rates. If the BoC does cut again (a low probability), it may not be a full quarter-point. The BoC could potentially drop rates 10 or 15 bps instead, as Australia is considering.
  • The Bank also updated its long-run estimate of Canada’s neutral rate, saying “We assess that the Canadian nominal neutral rate lies in a range between 1.75 and 2.75 percent…” That suggests the Bank thinks rates will eventually level out just two percentage points (give or take) above today’s rates. That projection is 50 basis points lower than the BoC’s April 2019 estimate. We’ll talk more on this in a separate story.

How to Play It

  • 5-year fixed rates from fair-penalty lenders will continue appealing to most borrowers, for multiple reasons:
    • The best nationally available 5-year fixed and variable rates are currently just 5 bps apart. Insured 5-year fixed rates are below variable rates. Most consider a 5 bps rate premium peanuts for peace of mind, as they should.
    • Inflation risk in or before 2024 and 2025 is real, meaning the probabilities of rate increases by then are also real.
    • Even if the BoC dropped rates 25 bps, the cost of being wrong by choosing a 5-year fixed is modest ($245 of extra interest per year per $100,000 of mortgage).
  • Given the Bank’s no-hikes-till-2023 view, many risk-tolerant insured and insurable borrowers will gravitate to 1-year fixed rates.
    • Note: When we say “many” we mean more than usual—i.e., tens of thousands of borrowers in the next year. That’s still a small percentage of the 6 million mortgagor households in Canada.
    • One-year fixed rates have never been cheaper and can now be found for as low as 1.24% in AB, BC, NL, ON and PE.
    • That said, a 1-year term shaves just 16 +/- bps off the best 5-year fixed or variable rates. Therefore, wanna-be rate timers should carefully consider whether that reward — $150/year in interest savings per $100,000 of mortgage — is worth the risk.



32 Comments

  • Steve says:

    Hi. Is there any benefit to a 2 year rate of 1.69% in this market?

    • The Spy says:

      Hi Steve, Yes, if the borrower doesn’t want to worry about renewing in 8-9 months.

      With a 2yr you can renew in 20-21 months (sometimes sooner with banks like Scotia). That said, a lot can happen with rates or people’s finances/housing plans in 20-21 months. That’s why some prefer the flexibility of a 1yr fixed.

  • Peter Zhang says:

    Hi Spy,

    I currently have 1.15% (Insured 5 yr variable rate) with 4.5 yrs remaining with $745K mortgage left. Should I continue or lock in for 5 yrs. fixed rate If I get close to 1.35% or even lower? I am not selling home for next 5 years.

    Any Advice would be helpful.

    Thank you.

    Again, Thank you.

    • The Spy says:

      Hi Peter, Congrats on the amazing rate. I’d hold on to it as long as I could unless my risk tolerance or financial/employment outlook deteriorated. If somehow we’re 1-2 more years into the recovery, 5yr fixed rates dip into the 1.20s or 1.30s, and bond yields shoot up, maybe then it might make more sense. But rate timing can be hazardous to your wallet. At the very least, I’d do nothing until 5yr bond yields shot above 0.60%.

  • DK says:

    What do you guys think the odds are that the bank of Canada lowers rates again?

  • Appraiser says:

    “We assess that the Canadian nominal neutral rate lies in a range between 1.75 and 2.75 percent…”

    Wow! Never thought I’d read that in my lifetime, and an almost unfathomable delusion not so long.

    Rates being low for long has been the song since the GFC. A world-wide financial calamity from which much of the developed world (ie. Europe) never fully recovered.

    And now Covid.

    • The Spy says:

      Hey Appraiser, All true. And this time the feds have made historical comparisons more challenging with Canada having the biggest deficit ratio in the world, 19.9% of GDP. Rates may be magnetized to zero for months/quarters/years but it’s hard to predict how the inflation story ends.

  • BH says:

    Do you see the big banks dropping their prime rate anytime soon?

  • S says:

    Where can I get 1.15% fixed mortgage rate

  • Michelle says:

    Hi I’m currently with a credit union 5yr fixed morgsge at 3.78 2 yrs left to renue . Would it be beneficial to try and get a lower rate now or just wait it out till 2023?
    Thanks

  • RG says:

    Hi,

    I currently have 1.4% Variable, 5 year mortgage. Only 6-7 months completed till now. There is an offer for 1.59% fixed 5 year. Should I take it or wait for few more quarters?

    • The Spy says:

      Hi RG, Presumably you took a risk on a variable for a reason. Did something change in your personal/financial outlook to justify paying 19 bps more for a 5yr fixed? And is that 1.59% being offered by the same lender that holds your variable mortgage?

  • CK says:

    Hi there, my term is up Nov 1. Debating between 1.95% 5 year fixed and 1.68% variable. $250k remaining. Leaning toward variable. Any thoughts? Thank you!

    • The Spy says:

      Hey CK, Tough to say as you don’t mention your balance, remaining amortization, lender, home value, risk tolerance, employment stability, credit or debt load. But 1.95% on a 5yr is definitely higher than you can find elsewhere.

  • WW says:

    Hello,
    Similiar question. I have a current 5 yr fixed rate @ 3.25% with 2 years remaining. Would it be beneficial to blend and decrease with a current rate of 2.04%, making an effective rate of 2.61% for another 5 years. 17 year amortization and no penalties. Thanks

    • The Spy says:

      Hi WW, What is your lender name, home value, original purchase price, mortgage balance, remaining amortization and penalty if you leave?

  • Ronald Scott says:

    I have a 3.39% fixed with TD with 3 years left. Should I a) break this mortgage, pay penalty & try a lower rate? How much low do I need to go to recover my losses?
    b) go back to TD and blend my mortgage for another 5 year fixed?

  • bcguy says:

    I have a renewal coming up in late January. I have a quote from a broker, my bank and waiting for my current mortgage holder to see if they will match.

    At what point am I committed to 1 of the 3? I’m being asked to initial a quote from one and I’m not sure if that is the legal acceptance. Also would you commit now or wait until December to see if rates get even better?

    • The Spy says:

      Hi bcguy, We don’t give legal advice here but typically a borrower is not committed until they sign the documents which allow the lender to register the mortgage. That’s typically done at the end of the process with a lawyer or signing agent, not a broker or bank advisor. Initialing a quote doesn’t sound legally binding but you’d know best what you’re initially. If in doubt, ask the lender/broker what you’re committing to.

      Rates may get a tiny bit better before year-end but if you want a fixed and see Canada’s 5-year yield exceed 0.50%, lock in QUICK. Allow at least 30 days to close.

  • Rohit Garg says:

    Hi Ratespy,
    Thanks for your reply above. No change if personal financial situation. When I got variable at 1.4, fixed was 2.19. Now since they are really close, I am thinking if the fixed rate is better option with 5 year outlook. Do you think fixed rate can drive further down? Getting from same lender, no penalty on switching to fixed.

    • The Spy says:

      Hi Rohit, Fixed rates can certainly inch down a bit more but I wouldn’t bank on a big drop from here — unless it looks like we’re headed into recession again (not likely).

  • Rp says:

    Current rate @3.14% and 2yrs left on 5yr fixed mortgage with 425k balance.
    Penalties would cost me roughly 14k to switch for better rates.
    Not planning to move yet. Never planned but still thinking of breaking this mortgage for better rates.
    5yr fixed at 1.8% or 1.7% variable?

    What would be your suggestion on this?
    On the other side switching to bank would let me access the equity in my house. ( 650k appraisal). Currently there is no access to the equity.

    Thank you

    • The Spy says:

      Hi RP, It’s not economical to break 3.14% with a 14k penalty and two years to go, just to save on the rate through 2022.
      On the other hand, if accessing your equity is important to you and you’re concerned about higher rates in 2023+, that might be justification enough.
      In that case you can always ask your existing lender to discount the penalty to keep your business, assuming they can provide the rates, terms and HELOC/equity take-out you want. If they balk, you can prepay their mortgage to lower your penalty, and then refi elsewhere.

      Fixed/variable is partly a personal decision and there’s not enough info on you to advise on it here. But that 10 bps spread is scant compensation for the rate risk of a variable. Just be cognizant of 5yr fixed IRD penalties if there’s a chance you’ll have to break early.

  • Mario S says:

    I would like to sincerely thank this website for helping me learn some negotiation skills for my mortgage renewal. Big blue gave me a rate exception, 1.84% fixed for 5 years, a welcome change from the 2.39% that I was previously paying fixed over 4 years and had come to term. I live in QC, so I learned not to expect the better discounts found in ON. I hope that others here also learn how to pay less.

  • ano says:

    Hi, I have currently a 5 years fixed @ 3.64%, with 2.6 yrs remaining in my term, balance is 339000, amortization 23 yrs & 9 months. my bank offers 13000 penalty with 5 yrs fixed @ 1.9% or blend with 5 yrs fixed @ 2.83%. What should I do?

    • The Spy says:

      Hi Ano, There’s not enough info to advise you on the right term, but if I were in similar shoes with an insurable mortgage I’d make a prepayment to lower the penalty and consider a fixed at 1.65% or less (at another lender if the existing lender didn’t match). You didn’t say what the home is worth but if you have 30-35% equity and you qualify as “insurable,” it opens up a lot more options.

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