Fixed mortgage rates look like a runaway train. Thanks to Friday’s epic jobs report, the 5-year government bond yield, a leading indicator of fixed rates, closed the week above 1.00% for the first time in a year.
That coincided with a barrage of new fixed-rate hikes at the big banks. Most major banks internally elevated their fixed rates this week — by about 10-15 bps.
Publicly, RBC lifted its “special offer” 5-year fixed from 2.24% to 2.39% and 7-year fixed from 3.09% to 3.19%.
BMO boosted its 5-year “Smart fixed” from 2.24% to 2.34% and from 2.09% to 2.19% if the mortgage is default insured.
Variables Will (Eventually) Get More Appealing
As this trend continues, and it will, we could easily see variables regain a one-point edge over 5-year fixed rates — something that hasn’t happened since 2011 (based on RateSpy’s database of major bank rates). That’s when you’ll see people more seriously consider floating their rate.
As it stands, the market is pricing in 75 bps of BoC rate hikes within two years and almost 150 bps of hikes within three years. Those are not outlandish estimates by any stretch, given the stimulus-fuelled post-vaccine GDP growth ahead.
Near-term, there’s no risk of an overnight rate increase, as this chart of the 2-year government yield versus the Bank of Canada’s key lending rate shows. Once the 2-year runs more than a quarter-point (25+ bps) above the overnight rate (it’s 8 bps above now), that’s when you have to start worrying about a prime rate hike within 3-6 months.
Looking further out, the market is still pricing in materially higher 5-year bond yields, five years from now — about 113 bps higher. If market expectations are right, 5-year fixed rates could have a 3-handle within 12-24 months. In other words, they should more than double from this year’s record lows.
Will those kinds of increases be a wet blanket for home price appreciation? It’s possible, if rates climb enough. We’ll delve into that more this week.
One last quick note. Salutations to all you long-term financers who snagged the all-time low 1.98% 10-year fixed rate you saw on the Spy last month. You can pat yourselves on the back—for now at least. The rate premium you paid may soon seem insignificant as 5-year fixed rates surge past the 2% mark.