Variable Advantage Fades: The lowest widely available 5-year fixed rates are now just 20 basis points more than the lowest variable rates. That differential has shrunk considerably in the last month or so, causing some would-be variable takers to give up and go fixed. RateSpy simulations confirm it would now only take two 1/4-point rate hikes anytime in the next three years for the lowest 5-year fixed rates to outperform variables, other things equal. That’s based on interest cost alone and assumes standard terms with no changes to the mortgage for five years. That said, there are other fixed / variable factors to consider.
Deflation Threat: Average core inflation in Canada has never dipped below 1.40% this millennium. But it could—potentially before the end of this year as collapsing demand causes disinflation (or, God forbid, deflation). “I worry the economic structure gets damaged…(that) there is scarring, businesses get shut, people are unemployed, you can’t go back to where you left off,” says the IMF’s Tobias Adrian. If core inflation risks undershooting the BoC’s 1% minimum, incoming BoC Governor Tiff Macklem may be forced to cut rates again to get Canada back to its 2% CPI target. The danger of deflation, which can trigger vicious downward economic spirals, can’t be overstated. Is this possibility reason enough to choose a variable rate? Absolutely not. But it’s not exactly a harbinger of soaring rates either.
False Analogue: “…Comparisons to the deflation seen in the Great Depression are not helpful,” says the BoC’s Carolyn Wilkins. “For one thing, the banking sector is in much better shape than it was at that time. For another, we will not make the same policy errors,” she promises.
BMO Cuts Fixed Rates:Big bank mortgage rates continue to fall. The nation’s 4th largest bank lowered two special fixed rates on Monday:
3yr fixed: 2.99% to 2.89%
5yr ‘Smart’ Fixed (default insured): 2.99% to 2.79%
10% Drop from the Peak: That’s Moody’s prediction for home prices this year. “Not even lower interest rates will be enough to save the housing market,” said Moody’s economist Abhilasha Singh. (Especially with the stress test overinflated thanks to artificially high big bank 5-year posted rates. -ed.) “As the outlook begins to improve in early 2021, house prices are expected to rebound.”
Quotable: “We need to make it so that no Canadian relies on gains in housing wealth to feel secure…”—UBC professor, Paul Kershaw via Yahoo Finance. (Sounds good on paper, but imagine if retirement savers had to find a replacement for home appreciation. Now imagine it in a slowing economy with meagre savings rates, near-zero interest rates, less income/employment growth, higher taxes and fewer pensions. Not a pretty picture. -ed.)