BoC Hikes Again. So Long Sub-2% Mortgage Rates

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:

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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.

6 Comments

  • Sean says:

    I have preapproval rates on offer with my bank from before the two recent rate hikes, and am now deciding between:

    2-year fixed – 2.34
    5-year fixed – 2.84

    I had my heart set on the 2-year fixed, thinking there would only be a couple more hikes before things would have to come back down, and then I’d renew on a variable. But now all this excitement has me wondering if I should take advantage of the 5-year instead. What do you suggest?

    • The Spy says:

      Hey Sean, Can’t speak to which one’s right for you personally because that’s a long discussion. But if you model it out and focus just on the hypothetical interest cost:

      * The 2-year wins if there are no more than 3 more hikes
      * The 5-year wins if there are 4 or more hikes

      This assumes a 25-year amortization, the rate hikes occurring in the next couple of years, no changes to the mortgages before maturity and a renewal into a prime – 0.80% variable after 24 months.

      For most well-qualified risk-tolerant borrowers with financial safety nets, the 2-year is most compelling at this point.

  • Ralph Doncaster says:

    Despite the recent rise in bond rates, HSBC only increased their 5yr variable by 25bp to 2.39, and left their 2 & 5yr fixed rates unchanged at 2.59 & 2.79.

    For the people able to get a 2yr fixed for less than 2.4%, that’s a spread of less than 1% over 2yr Bank of Canada bonds. Meanwhile competitive 2yr GIC rates are closing in on 3% (2.7% at Oaken), so the big 5 will need lots of suckers buying their GICs to continue making good margins on mortgages. TD, for example, only pays 1.25% on a 2yr GIC.

  • Dean says:

    Many lenders are keeping their fixed rates as is, not just HSBC. I expect this to change very shortly.

  • John A says:

    I’m still seeing some great sub-2.70% rates on your site. Can we expect these to be around for a while or will they soon start to dry up? I’m concerned because my renewal is coming up in the spring and I’m worried about renewing into a higher rate. We currently have 2.71% for our 5yr fixed.

    • The Spy says:

      Hi John,

      The BoC would probably have to hike at least two more times for *all* sub-2.70% rates to disappear. There’s certainly a chance that could happen before you’re 90 to 120 days from closing (the longest economical rate hold periods).

      Have you talked to your lender about the possibility of early renewal?

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