One-Year Mortgages Edge Closer to 1%

Mortgage rates drop to multi-week lows

Not One and Done

  • If you’re going to gamble on a short-term rate, you could do a lot worse than 1.29%. On a contract rate basis, that’s the lowest fixed mortgage rate Canada has ever seen. And it’s probably not done dropping yet.
  • This latest one-year offer is available in select provinces and applies to high-ratio and insurable mortgages up to 65% loan-to-value only. Check out the 1-year fixed rates page for more info.
  • When 1-year terms broke below the 1.50% barrier in July, they garnered a noticeable uptick in interest at the Spy—the most in years, as a matter of fact. An increasing number of mortgage shoppers seem willing to trade convenience (given you have to renew a one-year every 12 months) with the fact the BoC likely won’t rain on the parade with rate hikes for several quarters. Commentators say “years,” but who really knows?
  • The bond market thinks it knows—and it’s not pricing in a BoC hike until mid-2023. And while investors are often wrong, the market is usually the best rate forecaster there is.
  • That said, the world has seen an avalanche of fiscal support like never before in history. The potential therefore exists for inflation expectations to front-run analyst forecasts, lifting rates a bit earlier than expected (as noted in this month’s Globe column).
  • Note, the bond market often anticipates good news 1-2 years in advance. Therefore Canada’s recovery would have to be quite dismal for our 5-year government yield not to top the key 0.60% level by the end of next year. When that finally happens, fixed rates will jump somewhat. Of course, with a second COVID wave upon us, such economic disappointment would not be unlikely, and would play right into the hands of one-year mortgagors.

RBC Cuts

  • The nation’s top bank (at least by market capitalization) lowered two special fixed rates on Thursday:
    • 5yr: 2.29% to 2.22%
      • This is an almost meaningless rate given the entire relevant Canadian lender universe is sub-2% on 5-year money for qualified borrowers (including RBC itself on a discretionary basis).
    • 7yr: 3.14% to 3.04%

Credit Rating Alert

  • Runaway federal spending could “renew negative [credit] ratings pressure” for Canada, said Fitch on Friday. In other words, cost Canada more of its AAA credit ratings. Fitch became the first bond rating agency to cut Canada’s debt rating in June. Loss of multiple AAA ratings would damage our perceived creditworthiness and could incrementally increase Canadian bond yields. Other things equal, that would potentially boost fixed mortgage rates (slightly). But it wouldn’t happen near-term.
  • Rating agencies have reason for concern. As economist David Rosenberg wrote Thursday: “Over the past two decades, the correlation between the ratio of Canadian federal government spending to GDP and the pace of economic activity has been -26 per cent. That’s right, more government spending actually does more to hurt than help the economy.” That’s rate bearish, and another example of why “other things” are rarely “equal” in economics.

Getting Off Deferrals

  • “Roughly 32% of Canadians who opted to defer their mortgage payments have resumed payments as of August 31.”—CBA

Q-E.xit

  • “We expect a mild rise in rates as the Bank slows and eventually ends its quantitative easing (QE), perhaps by the end of 2021,” says the BCREA. “Studies show QE lowers long-term interest rates by 10-25 basis points, so we can anticipate a similar magnitude rise in 5-year rates when QE ends.”
  • “…The Bank will slow or end its current program of bond purchases…potentially midway through 2021. As those purchases slow, long-term interest rates will likely rise, even with the Bank maintaining its policy rate at 0.25 per cent.”

CMHC Boss Wanted Federal Intervention

  • CMHC CEO Evan Siddall wanted the Feds to force his competitors to abide by the same rules he imposed on CMHC borrowers July 1, reports the Financial Post. But he couldn’t get officials to bite. “Would I have preferred the industry to do that across the board? Yeah. But that’s not my call, it’s the Department of Finance’s call,” he told the Post. Siddall said he tightened lending to avoid a “drag on the economy.” But there’s more to that story.


13 Comments

  • neo says:

    Hi Spy!!

    Thank you for this website and all the useful insights (and info and intel)!

    One question I have been wondering, is that as we know when we negotiate with non-fair lenders, we could also negotiate the contract terms in addition to just the rate; but for example, I’m negotiating with one of the big 6, say TD, what kind of better penalty terms could I be proposing? Or in other words, what questions should I ask when negotiating would make me sound like a pro in order to get more out of the banks 😀

    • The Spy says:

      Hi Neo, Thanks for the kind feedback. Unfortunately, penalty clauses are virtually never negotiable at the time you originally apply for the mortgage. Attempting to negotiate penalties then would be the opposite of appearing like a pro. 😐

      The main points of negotiation with Big 6 banks are the rate and fees. Most of the other stuff is frozen in their boilerplate mortgage contracts.

      You can use your knowledge of competitor rates and terms, your loan size (if large), your excellent qualifications (if applicable) and other business you have with the bank as fulcrums in your negotiations. Other tips: https://www.ratespy.com/negotiating-better-mortgage-rate-09033016

  • Pete-D says:

    1.29% 1 year fixed or 1.52% variable. What do you guys think is best?

    • The Spy says:

      Hey Pete-D, Depends partly on borrower characteristics, but odds of success are arguably better in a 23 bps lower rate for a well qualified borrower who doesn’t plan to lock in.

      Just keep in mind there is some degree of renewal risk in a 1-year term. And you don’t get the ability to lock in early without penalty. But we don’t usually recommend getting a variable with the intention of locking in due to timing challenges and rate slippage.

      On the other hand, a one-year affords the potential to secure even better terms in 8-9 months and usually entails less penalty risk.

  • Gkurry says:

    Only 1/3 of deferrals have restarted payments? That seems low.

  • SHARON says:

    Hi, I have two years left on my mortgage at a 3.29% and was wondering what my best options are? Should I renew my mortgage at a better rate and suck up the penalty, or just stay with what I have.

    • The Spy says:

      Hi Sharon, I hate to say “it depends,” but it does: on the penalty amount, mortgage balance, lender and remaining amortization. It can also depend on your qualifications and goals/plans for the next two and five years.

  • neo says:

    Hi Spy!

    Thank you for your reply!

    I’m wondering now what exactly do you mean by “fees” that’s negotiable in addition to the rate? Is it the fees for the contract I’m about to break, or is it the fees for the new upcoming one that I need to pay? I’m guessing it’s the fees that come with the penalty breaking the current one? Or is it also negotiable about the fees breaking the future contract? Or is there other fees that I should know about but I didn’t…

    Thanks a lot!!

  • Tara says:

    My husband and I are with BMO. We purchased our home in 2018 with a 10 year 3.49% fixed rate. Last week we went to the bank and renegotiated a new mortgage term for 5 years at 1.89% and paid a $863 penalty. The bank wanted to charge us $1,563 (3 months worth of interest), but I negotiated to nock off $700, because of all the BS the bank put us through and that they never gave us the promised money for our notary back in 2018 when we bought our house. SO JUST TRY YOUR BEST TO NEGOTIATE and if they say no, a 3 month interest penalty is still going to save you lots of money in the long run if you lock in with a significantly lower rate than what you had before Covid.

  • neo says:

    Hi again Spy!

    Just came back from the bank (TD) and got 1.69 on 4 year and 1.84 on 5 year (both fixed, non high ratio, for refinance), pretty much the same with Zack here: https://www.ratespy.com/bank-of-canada-re-signals-a-long-road-to-recovery-090915703#comment-127106

    While I know at here we usually recommend to pay a small premium (15 basis points in this case) for a longer time of relatively low interest rate, am I crazy to have a plan like the following?

    1. I get the 4 year super low (I hope 1.69 is super low by any definition) rate
    2. I wait until the BoC rate as well as the 5-year bond yield to start increasing (in ~3rd year?)
    3. I break this 4 year contract (which would be relatively cheaper than the 5 year)
    4. And immediately sign up for another 5-year while the rate is still relatively (to the future) low

    Or I’m def crazy and should just go with 5-yr and wait/negotiate for a better rate 😂

    Again, can’t say thank you enough for all the insights!!

    • The Spy says:

      Hi Neo,

      Regarding: “2. I wait until the BoC rate as well as the 5-year bond yield to start increasing (in ~3rd year?)”

      The problem with that is, bond yields — and hence fixed mortgage rates — start rising well before the BoC hikes and/or much faster than expected. That makes most borrowers routinely late with locking in.

      And sometimes, spikes in fixed rates prove temporary and/or BoC tightening is deferred (despite BoC messaging to the contrary). Those headfakes can be costly when yields fall back to earth, leaving borrowers with an elevated refinance rate for no reason.

      That’s on top of rate slippage, the interest rate premium most pay when moving into a new rate with their existing or new lender.

      All this said, we’re going to run a story soon about market timing with more tips.

  • neo says:

    Hi Spy!

    Thank you for the insights!!

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