Scotia, the largest bank in the mortgage broker channel, boosted multiple fixed rates, but actually lowered its variable rates. That seems to be the playbook now as banks try to entice people to float their mortgages amid rising fixed-rate funding costs.
While the lowest-ever fixed rates are now long gone, you can still fetch 5-year fixed rates (even uninsured rates) at 1.69% or less. That’s still a gift from the rate gods and more than one point below last April.
Fixed and Variable Rates Diverge
The “fixed-variable spread”—the difference between big-bank discretionary 5-year fixed and variable rates—is back above 50 bps for the first time in two years.
That is, the security of a 5-year fixed will now cost you a half-point more (roughly speaking) than a floating-rate mortgage.
This changes the math for term selection, versus just a few months ago when the spread was much narrower. Variable rates now provide an upfront edge that would likely require three to four BoC rate hikes to nullify.
To illustrate, suppose the Bank of Canada lifted its overnight rate by 100 basis points in 2023. If that happened (a legit possibility), today’s best 5-year fixed rates would prove more economical than a variable rate, based on interest cost alone.
The conversation gets more interesting when you consider that rate-hike expectations have been dramatically pulled forward since the start of the year. “Overnight index swaps (OIS) now imply that the Bank will raise interest rates in early 2022, with a total of 110 bps of hikes by the end of 2023,” said Capital Economics last week. Not long ago, the market’s assumption was for BoC tightening to start in mid-2023.
So Much for QE
The Bank of Canada is still buying 5-year government bonds, which it says “lower[s] interest rates on five-year fixed-rate mortgages…”
The policy is called quantitative easing (QE) and the Bank says it’s supposed to make it “cheaper to borrow to buy a house.” But you wouldn’t know it from the 5-year bond’s 28-bps surge last week.
While the Bank of Canada doesn’t want to see the 5-year yield run too high, its QE program is not designed to manipulate rates (i.e., prevent them from rising). What QE does is add more demand for bonds to keep 5-year rates lower than they otherwise would be.