Variable-rate Mortgages Should Get Cheaper

  • Variable rates on new mortgages could get a little cheaper this quarter, for one of four reasons, or maybe all four:
    • Bankers’ acceptance (BA) rates — a general proxy for variable-rate funding costs — are at an all-time low. That’s boosted the spread between prime rate and BAs to almost a 12-year high. Think of that spread as a rough measure of how much banks can discount floating-rate mortgages. In other words, there’s now more room to discount.
    • There’s growing chatter about the Bank of Canada cutting rates by 10 to 15 basis points in one of its next two meetings. One can’t rely on this, but it’s possible given the economic ramifications of government-imposed isolation.
    • Thanks to the Ottawa’s liquidity support, banks can borrow 5-year money for just 49 basis points more than the government of Canada. That’s the lowest premium to risk-free government bonds that we’ve ever seen, at least since we started tracking this data in 2010. That means banks have billions in cash sloshing around that must be put to work. Mortgages are a nice safe—albeit low yielding—place to deploy capital. Moreover, with fixed-rates dominating consumer uptake, some lenders will naturally want to balance out their mortgage books with variable-rate loans.
    • If economists are right (don’t laugh), rates will climb in a few years or less. That means a not-insignificant number of people in variable rates will lock in. Banks love this. Their profit margins tend to shoot up when that happens (largely because most people don’t get the best fixed rates when locking in). They get what’s called a “conversion rate,” and it’s usually not overly competitive. That’s an incentive for some lenders to offer enticing variable rates now.

This & That

  • 45% of Canadians say they’re concerned about interest rates in the next year. And yes, there’s always a percentage of people “concerned” about interest rates. But what’s more interesting is the sizeable percentage who aren’t. RBC Poll
  • In case you hadn’t heard, Canadians are bullish on housing. 52% expect price increases over the next six months, the most in over a decade. The Story
  • BMO has lowered the following posted fixed rate:
    • 1yr: 3.09% to 2.79%
  • RBC has raised the following special fixed rates, which is curious given industry-wide funding costs haven’t materially increased:  
    • 4yr: 2.04% to 2.19%
    • 5yr: 2.17% to 2.32%
    • 7Yr: 3.04% to 3.19%

Quotable

  • “The path for the economy really depends on infection rates, not interest rates…A change in the interest rate of 10 bps is not going to do a whole lot.”—Royce Mendes, CIBC Capital Markets on a potential BoC “micro cut”



7 Comments

  • Steven says:

    I’m really torn what to do with a relatively new variable mortgage.

    I’m currently prime minus 1.05 (1.4%) in Alberta on house I purchased with 20% down in June. I am considering locking in with an offer from my current lender at 1.54% for 5 years. I am working with them to see if they are willing to forgo or reduce my 3 month’s Interest penalty. ($1500).

    I worry that inflation and therefore rates will increase sooner than 2023 so the thought of locking in at a fairly close rate is tempting. I would appreciate your thoughts on what direction makes sense if possible. Thanks

    • The Spy says:

      Hi Steven,

      We get this question a lot and the answer is this: It’s impossible to know where rates will end up but you’re right to be worried about inflation in 2022 or 2023 — given all the stimulus being thrown at the market, the strong housing market, the strong stock market, the bounceback in employment (notwithstanding this latest lockdown), among many other reasons.

      There probably won’t be a major spike in inflation but there could be enough to elevate rates for a few years.

      Choosing a term is always an educated gamble based on your personal finances and tolerances. If risk minimization is important to you, locking into a 5-year fixed at a small premium to your variable rate could be a reasonable move — so long as it’s a fair penalty lender and not an overly restrictive mortgage.

      P.S. Most variables allow you to lock in without penalty. Who is your lender and what sort of penalty-free “conversion rate” are they offering?

  • ABbroker says:

    I’m surprised banks aren’t dropping their 1 and 2 year posted rates more to generate bigger prepayment charges. I bet a lot of people will want to refinance once they hear rates are going up.

  • Tyler says:

    @ABbroker i bet you the banks are smart. They know the prepayment people are willing to take to refinance and post rates accordingly. Other thing is if they lower the posted rates too much then they might have to decrease their 3-5 as well which means 3 years down the road they’ll make less in prepayments….unless they keep lowering it, but if they lower it now then their is no/little room for them to do so again in 3-5

  • Syed says:

    Hi rate spy, are there any brokers you can connect me with ? I am on 5 year variable rate but I feel like my rates are higher than what it should be.

    • The Spy says:

      Hi Syed, Because we deal with so many mortgage providers we can’t recommend one in particular. That said, you’ll find a bunch of reputable brokerages advertising on this site.

  • Steven says:

    Hi I thanks for your reply. The lender is think financial and they were offering 1.64 penalty free. They did reduce the penalty down to $1200 from $1578 for the 1.54%

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