A scattering of lenders are starting to warn of impending rate increases. No surprise—given Canada’s 5-year bond yield, which drives fixed mortgage rates, hit a new relative high on Thursday. At 0.60%, it’s now the highest it’s been since April 9, 2020.
When the 5-year yield was last at these levels, your typical discretionary 5-year fixed rate at a Big 6 bank was over one point higher—2.89% versus just 1.84% today.
So, are we going back to 2.89% anytime soon? No chance. Those were inflated spreads triggered by the COVID crisis. But, some kind of increase is likely in the cards, particularly for the most competitive rates. The lowest nationally available uninsured5-year fixed is 1.69%, for example. That’s just a 109-bpsspread above the 5-year yield (135+ is more normal for deep-discount rates).
All of this means one thing: It’s rate-hold time if you’re closing a mortgage between now and the end of June (since most rate guarantees last only 120 days or less).
Some lenders will milk their current low rates for all they’re worth in order to keep the volume flowing—i.e., they’ll defer rate increases. But don’t bet on that lasting long…unless there’s a further derailment of our economy, which is possible, but less probable the further we get into 2021.
Mortgage Penalty Workaround
There’s an old trick to reduce mortgage penalties that’s been making the rounds on social media. Here’s the story that’s creating the buzz. It’s got the mortgage Twittersphere rejoicing because it lets the little guy use the bank’s own penalty rules against it.
It works like this: Instead of breaking your mortgage and paying a huge IRD penalty, you:
request a “blend and extend” into a new 5-year fixed term
then break the mortgage.
The blend and extend resets the mortgage term (at some lenders) and lets the borrower take advantage of more favourable (higher) comparison rates. The higher comparison rate reduces one’s interest rate differential and the penalty drops from a fiendishly expensive IRD charge to a much cheaper three months’ interest.
If you want to try this yourself, note the following:
It does work, but only at a limited number of lenders.
Many lenders don’t permit blends into new terms (many force you to blend to term, meaning you keep your existing term until the maturity date). This negates the strategy altogether.
Some lenders have closed this loophole in other ways (e.g., contractually).
You need to confirm if your lender’s policies support this manoeuvre. You can run a test scenario using your lender’s penalty calculator, or you can just call the lender to ask what your penalty would be if you blended and extended, and then had to break the mortgage one month later.
Sadly, most lenders who still allow this loophole will eventually close it. And this story doesn’t help. At other lenders, however, it’ll take a while.