Rates Get Closer to Zero

—The Mortgage Report: Aug. 4—

  • Historic 5-year Yield: On Tuesday the U.S. 5-year Treasury traded just 19 basis points above zero—where it’s never been before. If it drops a smidgen lower, that could be enough to drag Canada’s 5-year yield (and hence, 5-year fixed mortgage rates) to record lows as well. Stay tuned.
  • Setting the Pace: Tangerine now has the lowest nationally advertised 5-year fixed for refinances, after slashing its rate 30 bps to 1.99%. And it’s got a strong set of features to boot, if you don’t mind a collateral-charge mortgage. Tangerine Mortgage Rates
  • The Latest on Fixed vs. Variable: Last week’s Globe column didn’t give the warm and fuzzies to variable-lovers. But what can we say? The stars simply aren’t lining up for variable-rate mortgages like they used to (unless you already have one at a deep discount). Die-hard variable fans have had a good run. God bless ’em. But when fixed rates are less than variables and prime is unlikely to dip further and we’re in an economic trough with unprecedented stimulus underway, it’s time to re-evaluate. If you want to see myth battle fact, check out the story’s comment section.
  • A Fair-Penalty Readvanceable: Banks dominate the readvanceable mortgage market, but if you’re looking for a readvanceable without prepayment pain, you’ve got to think outside the bank. That story from RATESDOTCA
  • Problems in the Prairies: Saskatchewan’s 90-day mortgage arrears rate is approaching 1 in 100, double what it was five years ago and 73% higher than the next closest province (Alberta).
  • Opinion: “…Promoting homeownership for its own sake is just inflationary to pricing,” CMHC boss Evan Siddall told Yahoo Finance Canada. Siddall’s warning: that the home ownership “dream could become a nightmare.” His solution: to “increase the supply of rental housing” despite 72-80%+ of Canadians preferring to own—depending on what survey you believe. Given tight rental markets (COVID effects notwithstanding), incentivizing rental supply is just common sense. But incentivizing more of the product the majority want (new homes) is even more important if anyone hopes for prices to remain in check. That’s news to no one. It’s fundamental economics, and it doesn’t even speak to spin-off effects. Homebuying, for example, drives job creation in a way renting cannot (e.g., there’s roughly $80,000 of extra spending per average home purchase, via people buying furniture, appliances, renovations, home-related services, etc.). For reasons like that, CMHC’s crusade against owning might be energy better spent on getting hard-working middle-class Canadians into cheaper home ownership, perhaps by promoting new ultra-high-speed transportation to shuttle commuters to lower-cost markets in minutes. Maybe then, young people could turn their nightmare of home ownership back into a dream. Either way, families need lower-cost housing, but they don’t need falling long-term home prices. Without enough home equity for people to reverse-mortgage against in 20 years, the current generation of under-savers could be hooped.
  • Quotable: “…Markets typically move in big, multi-year cycles. . . Investors who react to what they perceive as short-term signals are likely, most of the time, to be basing their moves on little more than noise.”—Jason Zweig, personal finance columnist for The Wall Street Journal


  • Mike S says:

    Good comments from your Opinion section. Furthermore, I prefer bureaucrats, for example Siddall, to stop interfering with a free marketplace and instead let economic forces play out. He’s an individual who’s not in the game and has reckless / bias comments. He should work on resolving his foot-and-mouth disease which is an illness with many politicians.

  • Chris says:

    Already signed on a variable renewal but strongly considering switching to fixed at only 15 bps higher (with a fair-penalty lender) based on some of the good points made here and elsewhere.

    Just concerned about the potential penalty to break a fixed, since it’s 50/50 we’ll be selling during the five-year term. My understanding is that if fixed rates go up, we’re fine, but if they continue to decrease, we could still be looking at a substantial penalty.

    Normally we’d go variable automatically, but with the small spread today we can’t make up our minds whether the flexibility of a variable is still best for us even if we do end up losing out in terms of total interest paid.

    • The Spy says:

      Hey Chris,

      You raise a great question. Were it me, I’d pick the right lender (a fair penalty lender) and not let penalties be the deciding factor in this case, given it’s likely a 3-month penalty would apply regardless of the term being fixed or variable.

      5-year fixed rates can only drop so much from here, even if Canada’s 5-year yield goes negative. Theoretically yields could go extremely negative and fixed rates could still drop enough so that an IRD kicks in (particularly if you choose the wrong lender), but with the right lender that’s unlikely.

      In other words, if you do lose in a fixed rate, the extra cost is going to be immaterial most likely. And for that cost you’re getting value (peace of mind that you’re protected, if rates revert higher).

  • Within a short walk of my home in NS, I counted at least 9 homes that have sold 3 times in the last 5 years. Our municipality must love it, with a 1.5% land transfer tax every time. And I’d bet many of those sellers had to pay big penalties for terminating their mortgages early. Considering the local market was flat to slightly down for 4 out of the last 5 years, I think most of those short-term owners would’ve been better renting.

  • Matt says:

    There’s a lot of moving parts that feed in to housing prices, but I think the unspoken element in what Siddall is saying, is that CMHC’s provision of mortgage loan insurance, and the favourable capital treatment of CMHC insured mortgages, represents a massive government intervention in housing markets, and absent CMHC, the mortgage market would’ve developed in a different way, which likely would’ve been much less supportive of housing prices. Layer on top of that the favourable tax treatment of capital gains on principal residences (and no, mortgage interest shouldn’t be deductible if you tax capital gains on houses, unless you also tax imputed rental income), and there’s a pretty good argument that the structure of the Canadian economy has been distorted by housing price favourable government interventions. And that’s before even addressing the distorting impact of zoning decisions that have suppressed density. Been to Forest Hill lately? There is no reason for the 100 foot frontage lots occupied by 5 people so close to downtown Toronto except for extremely poor urban planning decisions, that not coincidentally have amped housing prices for the upper middle class and created a de facto segregated city. You want the market to govern housing prices, Mike S. Sure. Then let’s abolish CMHC, double the density permitted across Toronto, and tax the capital gains on principal residences. That would bring us a little closer to a “free market” in real estate. It wouldn’t do wonders for real estate investors, though.

  • LT says:

    If you think about it CMHC has done almost nothing to distort housing.

    Obviously if CMHC did not exist you would not have 5% down but people would still buy. They’d just buy later and pay more for their mortgages.

    If insured mortgages did not exist, uninsured mortgages would take their place at a higher cost. That’s it. The consumer loses by paying more and waiting longer. Nothing else changes in the long run.

    The biggest thing distorting home prices is not CMHC intervention, it is bad immigration and housing stock policies by CMHC and our government.

    P.S. In a true free market there are no real estate capital gains taxes.

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