At the time this is being written (10:45 p.m. ET March 29), the top five most popular rates on our site are floating rates. It’s the first time we’ve seen this in weeks. And those numbers are based on tens of thousands of visitor clicks.
Given that fixed rates usually dominate, what does this suggest? Well, among other things, it tells us that:
(A) people aren’t overly worried about higher rates, despite rising inflation risk and market projections of up to 200 bps of rate tightening over the next five years,
(B) many variable fan’s cannot readily do the math to know what 100+ bps of rate hikes would cost them, relative to a 5-year fixed
(C) people really like rates in the low 1s and are willing to gamble, or feel they have to gamble because of financial pressure.
“Prediction is very difficult. Especially about the future.”
All we need to know is what rates will average over the next five years. Then the term decision is easy.
Knowing that variable rates would average more than a 5-year fixed through 2026, for example, would make a fair-penalty 5-year fixed quite appealing.
Too bad that few on earth can even credibly guess the path of rates five years into the future—at least with any consistent accuracy.
That unfortunate fact means borrowers have to rely on other things to choose a mortgage term, like:
- their financial comfort level
- their 5-year plan
- the probability that the next Bank of Canada rate change is likely an increase
- the fact that the market itself, which is practically the best rate predictor (albeit fallible), is pricing in more than five rate hikes by 2023.
Karl Schroeder has an insight way back that’s even more applicable than Niels Bohr’s quote, above. He said, “Foresight is not about predicting the future, it’s about minimizing surprise.” In this context that means: don’t guess on rates, manage risk.
If you’re a student of historical rate trends, you’ll likely agree that the risk-reward of floating-rate mortgages is currently unfavourable. But many folks out there remain pro-variable, even with the Bank of Canada assuring us that rates are at the “effective lower bound” and with GDP estimates surging. We’d be the last to say those folks are wrong, assuming they can easily bear the risk of being wrong.
Fortunately, financially secure borrowers are stress tested by lenders at much higher rates. If you’re one of those borrowers and you want to take a leap on a floating rate in the low 1s, then our data confirms one thing: you’ll have lots of company.
This & That
- Among homebuyers, 77% took mortgages with fixed rates last year
- Lenders across the market are reporting record mortgage volumes. Those lenders with the lowest rates are (not surprisingly) even busier. Approval times are longer than normal as a result, so if you have a financing condition/deadline, be sure to ask your mortgage advisor if they’re confident they can get your approval back in time.
- Big-Bank 5-year fixed rates are back above the psychological 2% threshold.
- “The near-term outlook is grim for homebuyers,” says RBC.
- Fitch estimates that “Vancouver and Toronto are currently overvalued by 23% and 32%, respectively,” for what that’s worth.