—The Mortgage Report: Aug. 27—
Closer to Free Money
- Never on record has a fixed-mortgage contract rate undershot 1.40% in Canada, until Thursday. This one-year fixed offer launched exclusively on RateSpy.com and it’s one more sign of the times. A sign that markets expect no significant boost in rates for as far as the eye can see.
- Just 18 months ago, one-year rates were twice as high at over 3%. By comparison, a 1.39% fixed rate saves $4,400 of interest over just 12 months on the average Canadian mortgage of $278,299.
- This offer is a full-featured one-year fixed applicable to borrowers with:
- It’s not applicable to refinances unfortunately. Canada’s lowest advertised uninsured fixed rate remains at 1.94%. That’s for a 2-year term. But some banks are sneakily hawking even lower discretionary rates.
- This deal is also available to qualified borrowers who are switching from another lender, but the borrower is responsible for the legal and appraisal fee. That’s usually not economical unless you have at least an average-sized mortgage.
- In terms of appeal, most folks don’t want a 1-year fixed mortgage. That’s a fact. But it’s also a fact that the lowest variable rate is 14 basis points higher. And—in this rate cycle, at least—existing variable rates are unlikely to fall further (since prime rate is constrained by the 0.25% “effective lower bound” of Canada’s overnight rate).
- Two more “perks”:
- One-year terms afford borrowers more flexibility to renegotiate sooner. With many lenders offering 120-day rate holds, a 1-year lets you lock in a renewal rate in as few as eight months.
- Moreover, as much as rate timing is generally ill-advised, one-year terms appeal to those who want to game the market by locking in at the best available rates with no penalty (as opposed to locking in a variable and accepting whatever fixed rate their lender offers).
Historic Day for the Fed
- Persistently low inflation has led the U.S. Federal Reserve to significantly change how it manages price levels. No longer will it routinely and preemptively raise rates before core inflation hits 2%. It will now allow inflation to “moderately” exceed 2% (one Fed member suggested 2.25% to 2.50%) “for some time.” The goal being to ensure inflation averages 2% over longer time periods.
- It’s the Fed’s first major inflation target tweak in years. Many analysts think it’ll result in rates staying suppressed for longer, even if unemployment sinks well below its long-run average. Indeed, Fed chief Jerome Powell reinforced that “a robust job market can be sustained without causing an outbreak of inflation.”
- That said, playing loose with price level targets also has the potential to fuel higher inflation expectations more quickly. So the jury is out on how much this actually extends the near-zero-rate environment.
- Given the linkage between U.S. and Canadian rates, the Fed’s move could indirectly influence our own central bank.