For now, the days of sub-2% everyday mortgage rates are officially over. Wednesday morning’s slightly surprising 1/4-point Bank of Canada hike was the nail in that coffin.
The ensuing 1/4-point bump in prime rate will push all remaining mortgage rates above the psychologically key 2% threshold.
By next week, the lowest rates should jump roughly as follows:
- Insured variable rates: From 1.89% to 2.14%+
- Uninsured variable rates: From 2.10% to 2.35%+
- Insured 5-year fixed rates: From 2.48% to 2.58%+
- Uninsured 5-year fixed rates: From 2.70%+ to 2.80%+
If you’re trying to strategize on your mortgage given today’s hike, below are some tidbits to remember:
- Even though 1.99% rates are gone, this doesn’t mean great deals are extinct. Any mortgage of 2.79% or less is a gift from the rate deities. Why? Because at that rate, you’re generally paying more principal than interest—assuming an amortization of 25 years or less. Five-year fixed borrowers have enjoyed this edge in just five of the last 82 years (as far back as the BoC’s records go).
- Your lender will almost never offer rates similar to above if you’re converting from a variable to a fixed. Instead, you’ll likely get its crusty old “conversion rate,” which is sometimes 15 to 20+ bps higher than it gives new borrowers. (Some lenders have a one-rate-fits-all policy, but they’re the minority.) Always compare your lender’s conversion rate—plus switching costs and penalties—to the best rate you can get elsewhere. Doing this math can be lucrative.
- As usual, the lowest rate is not necessarily the best rate. Instead, you want the mortgage with the lowest overall borrowing cost. So factor in early breakage penalties, porting rules, blend-and-increase options and refinance flexibility, if they’re applicable to your situation.
- The breakeven rate between a 5-year fixed and variable is roughly 0.69%, assuming three future rate hikes. In other words, if you find a variable rate or 1- to 3-year fixed rate that’s more than 2/3 of a percentage point lower than your best 5-year fixed option, it’s worth a look. That’s assuming you’re well qualified and can tolerate rate risk. For non-rate considerations, peruse this checklist when deciding between a fixed or variable rate.
- When it comes to rates, what goes up always comes down. Economies are cyclical and last quarter’s 4.5% GDP growth won’t last. Mortgage rates are cyclical too, so you can bet your stack that they’ll consistently run below 2% again. It won’t happen this year. Maybe not next year either. But it will happen some day.