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.