Canadian Rates Go Vertical

If you’ve never seen B.C.’s Squamish Chief, it’s an imposing mass of sheer cliff. And Canadian interest rates look like they’re climbing it.

The 5-year government yield, which leads fixed mortgage rates, is going straight up. It hasn’t moved this much within a nine-day span in a decade (November 2010, based on closing prices).

At 0.94%, it’s now doubled since February 11—up 45+ basis points in less than two weeks.

We’ve had record-low rate volatility for months now. Forceful trends of this nature—following periods of low volatility—typically have staying power. The reason: These moves reflect fundamental shifts in the economic outlook.

In such cases, yields generally don’t return to their breakout point for several quarters, often years. So if you need a mortgage, get your fixed rate while it’s hot.

The Window is Closing

Can fixed rates still make new lows, later this year? Anything’s possible I guess. But that’s not a bet most people will (or should) take.

With yields pushing up funding costs, dozens of lenders have already hiked fixed rates. But so far, still no moves from the Big 6 banks.

We’ll likely see a fat price adjustment from them soon. And after 11 months of declining rates, countless borrowers will see that, get butterflies and scramble to lock in.

In the meantime, the lowest fixed rates are still less than 5 bps from their all-time lows. That will not last.

Until this year, Canada had never seen rates like:

  • 1.28% for a high-ratio 5-year fixed
  • 1.59% for an uninsured 5-year fixed
  • 2.14% for an uninsured 10-year fixed

But as of this very moment, all of these killer deals are still available. By tomorrow or Monday, who knows?

Are Variables Still Relevant?

For most people, the answer is a resounding, “no.”

That is, unless you’ll have a short but unknown holding period and want the option of breaking early with a cheap three-months’ interest charge.

Why go variable when:

  • prime rate has hit its floor.
  • fixed rates will have risen well before prime rate (making a future rate lock somewhat futile).
  • market probabilities of rate hikes within two years are much higher than the probabilities of a rate cut (5-year forward rates are pricing in over a point of rate increases in the next 60 months)
  • you can still get a 5-year fixed for almost the same price as a riskier variable.
  • you can choose a fair-penalty lender to mitigate fixed-rate penalty risk, and
  • all it takes is two BoC hikes in 2023 for you to pay more in a variable (2023 is when the BoC is hinting we’ll see the first overnight rate increase).

The risk/reward of floating rates looks about as good right now as the risk/reward of shorting 1,000 GameStop overnight.

Well, perhaps not that bad.



9 Comments

  • Fenway says:

    Who wants to bet that 2.14% 10 year mortgage will be over 3.14% this time next year?

  • David says:

    Hey Fenway no kidding. On Feb 11th I commented on the story “Watch those swaps” asking if I should secure with Tangerine as 2.14% for 10 years. I only have 10 years left on my mortgage so it would be the last term. I don’t plan on moving ever so no issues there. I secured today which holds until June 25th. My BMO term is up July 1st (my last payment is June 25th) so I assume no penalty at this point…but not sure if BMO would charge a penalty for 5 days with no remaining payments. Will see

  • Steve says:

    I have a Prime-.072 that runs through to may 2025 We have moved into our “forever home” and I am lucky enough to work at a store that I will most likely take over and we have two young kids so unless something bad happens this is pretty much it. Cost certainty is something I factor into nearly every decision. Does it make sense to lock into a 7 or 10 yr mortgage now (I see Tangerine has a %2.14, which probably has lots of strings attached but you see where Im going here)

  • David says:

    Steve, I think it is about perspective. I feel fixed rates are a steal right now especially the 10 year. I remember my first term was 6% something so I will gladly take 2.14…heck my current 5 year is 2.39 and I thought that was a great term with BMO.

    I believe the variable will eventually be back in the 3-4% range just my gut…too much stimulus money especially in the US. I guess its a question of what would that do to your rate.

    That said I’m not an expert and no one really knows where rates will land (other than higher) given the recent news.

    The US fed is in a tough spot balancing labour market and unemployment…but you can’t ignore inflation. Honestly if inflation gets out of control the labour market and unemployment numbers won’t mean a shred.

    just my 2 cents

  • steve says:

    David thanks for the response. I have a buddy who is a mortgage broker who thinks he can get me a 1.79 5 yr fixed at Scotia…. So I think its time to lock in!

  • Tejas says:

    Hi,

    I currently have 1.15% (Insured 5 yr variable rate) with 4.2 yrs remaining with $740K 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.

  • Shaun says:

    Considering the BOC has said that they will not raise rates until 2023, I see variable rates being safe IMHO.

    I don’t think there’s a G7 country that could handle higher rates right now. That means yields will likely come down at some point this year (thanks to ‘yield control’ by central banks).

    When everyone thinks something is about to happen, it doesn’t always occur. I usually like to bet against the consensus. My view is that inflation will be temporary and potential problems with the variants/vaccines in 2021 will cause the ‘pent up demand’ and inflation to subside by late-summer. Just my two cents.

  • George says:

    Tangerine 10-year increased to 2.84%

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