Variable Rate Discounts Slowly Returning

When it comes to the best variable rates, the trend has become our friend. Floating rates continue to creep lower after spiking at the end of 2015.

Much of the improvement is thanks to shrinking credit spreads. In other words, lenders have been paying less to access short-term capital in the financial markets than a few months ago.

Another part of the equation is banks trying to shift borrowers into fixed rates. Per RBC Capital Markets:

“For variable-rate mortgages, pricing is normally set at a discount to the prime rate, which we estimate averages 75 basis points in normal times but can move to more than prime when banks’ wholesale cost of funds are high, as was the case in late 2007 and early 2008, or when banks are trying to influence mix, such as is currently the case with lower than normal discounts as banks are pushing customers into fixed-rate options.”

Barring another credit market hiccup, the best floating rates could continue improving to prime – 0.75% or better by the end of the summer.

Today, most lenders are at P-.45 (prime – 0.45%), give or take. That’s nothing to crack champagne over. In fact, P-.45 is only the 22nd best rate on the Spy, where you’ll find deals as savoury as P-.73 (1.97%).

Don’t Forget: Click the <Details> button to check the conditions of any rate you see on this site. Some of the lowest rates are for specific mortgage types, like insured only, “quick closes” or no-frills mortgages.

Fixed Is In

On the fixed-rate side, the lowest 5-year fixed on is 2.22%, tied with the all-time bottom set in March. That’s for insured deals only, because lenders absolutely L-O-V-E government guaranteed mortgages. They eat ’em up like piranhas on a chicken. (If your mortgage isn’t insured, don’t fret. You’ll pay just 10-15 basis points more.)

If big banks are your thing, BMO has a 2.59% advertised rate for its low-frills product. But that’s just a starting point. If you find a mortgage specialist who’s hungry, you can probably swing that rate on a full-frills mortgage, if not 2.54% or less. That goes for all the Big 6 banks — assuming you’re well qualified and haggle-ready.

The bargain of the week for financially secure borrowers is the two-year fixed, as long as you snag one below 2%. It’s got a better rate than a variable and way more flexibility. Flexibility is frequently downplayed by rate-obsessed borrowers and, if you like paying penalties or getting worse rates on blends and conversions, it should be.

Jargon Buster: “Blends” refers to the blended rate lenders give you when you increase your mortgage before maturity. “Conversions” refers to the practice of locking a variable mortgage into a fixed rate.

Short-term Rate Outlook

The month of April proved that government yields can bounce from today’s levels and barely impact fixed mortgage rates. For you folks who are 5-7 weeks from closing, haven’t applied yet and are wondering if you should risk waiting for a cheaper “30-day quick close” rate, the answer is likely, “yes.” (But speak to your mortgage adviser to confirm.)


Longer term, disinflationary global forces could continue weighing down rates, despite all the U.S. rate-hike chatter. In fact, check out the yield on the mother of all bonds, the 10-year U.S. Treasury. It’s within spitting distance of its all-time bottom, and Canadian rates won’t escape the gravitational pull if it makes a new low.

Funny enough, the Bank of Canada reminded everyone this week that rates should “normally” be 2.25 to 3.25 percentage points higher. (That story.) But that kind of hike typically requires persistent economic growth over 3% annually. Meanwhile, we’ll be lucky to break 1.50% to 1.75% this year and 2.50% within the next five years. That is, if you believe the likes of the IMF, UN and OECD (their forecasts). In 2015 the Canadian economy grew at a wretched 0.9%.

The moral: rates will go up and rates will go down, but it’s the average rate over your amortization that matters (actually it’s your weighted average that matters, but let’s not get technical). If you can easily handle potential rate hikes, why rush to pay 2.50%? With growth stuck in first gear and no foreseeable spike in inflation, sub-2% fixed and variable rates are worth rolling the dice on.

Quote of the Week

 “Although the economy faces downside risks, a surging housing market should diminish the Bank of Canada’s appetite to ease monetary policy…Elevated growth rates [from Federal stimulus spending] suggest the BoC’s appetite for any further rate cuts has substantially diminished.” — Bank of America Merrill Lynch  

Two things bear repeating here: 1) Bond yields—which drive fixed rates—can move independently from the Bank of Canada’s key lending rate; and 2) Prime rate doesn’t have to drop for shorter terms to prevail. Going sideways works too.



    • The Spy says:

      Excellent question Anthony. In general, rates for various terms will not be as low as they could have been, had these securitization changes not occurred. But we don’t expect a sizable direct impact on most variable-rate discounts.

  • Born2beWild says:

    Just wanted to say how much I appreciate this rate analysis you guys put together. It’s among the best out there, and it helps that it’s coming from those who have a finger on the pulse of the industry. This mortgage holder appreciates it!

  • Brian says:

    Just saw that the Fed is now expected to hike in June. Will this have any effect on the BOC?

    • The Spy says:

      Hey Brian, A Fed decision to hike rates would presumably reflect more positive prospects for the U.S. economy. Given that the U.S. is our largest goods export market, that would imply better growth and potentially higher inflation for Canada. In that case, other things equal, our financial markets would likely price in somewhat higher rates for a period of time, but the Bank of Canada would not raise rates because of it.

  • Russ says:

    My mortgage renewal isn’t due until next May, is there any reason I should rush to grab a new rate? I’m currently at 3.25%

    • The Spy says:

      Hey Russ,

      Other things equal, it usually doesn’t make sense to refinance a 3.25% mortgage with one year to go, solely to lower the rate. That’s factoring in fees and penalties (assuming it’s a closed mortgage).

      That said, it can make sense to refinance for other reasons. For example, a borrower may want to extend their term to lock in today’s low rates for another five years. The cheapest way to do that may be to negotiate a great rate with your existing lender, and have them “blend and extend” the mortgage with no fees or penalty.

      Note, however, that many lenders don’t offer no-penalty blends and extends. (You have to make sure the lender doesn’t hide the penalty in the new rate.) If you decide to refi, shop around your lender’s quote with a good broker and let the best option win.

  • RateSeeker says:

    Just noticed your new most popular rate feature on the homepage. just wanted to say I love it!!

  • The Spy says:

    Thanks Seeker, We’re enjoying it too. It’s kind of fun to see which rates thousands of people are clicking on most.

  • Guy says:

    Looking more and more like the forecasted 4 rate hikes in the U.S. this year aren’t going to materialize (shocker!) and expectations have swung back to a CUT from the BOC rather than a HIKE within the next year. With the economic data of late it looks like the central banks are prepared to hang up their rose coloured glasses for the time being.

    • The Spy says:

      Ah yes, the roller coaster that is forward guidance sure doesn’t help central bank credibility. That may someday be a problem when the Fed *really* needs to talk up or down the market.

  • Laura says:

    I’m stuck between a rock and a hard place deciding what to do with a renewal coming this month. My mortgage is not insured so I can’t get the best rates. Best I have is prime -.4 variable or a fixed at 2.47 4 years or 2.54 5 years. I want to refinance for a renovation likely next year… what should I do? I’m not ready to take the money out now. Help! My current VRM is prime -.85 so all the rates currently suck comparatively.

    • The Spy says:

      Hey Laura,

      For someone who’s well qualified, rates can be significantly lower than that. If it were me, I’d keep shopping and not even consider the P-.40% variable. For someone suited to a variable, a 1-year under 2% provides better value. Plus it lets the borrower refinance at best rates — and with no penalty — at the time of renewal.

      Rate aside, and assuming a longer term is chosen, someone who’s refinancing should look for a mortgage that allows:

      * increases with no penalty

      * increases while preserving the same rate on the existing borrowing (which is somewhat rare for variable-rate mortgages)

      * increases with no legal fees (a collateral charge mortgage and/or readvanceable line of credit can be useful for borrowers who KNOW they will refi before the term is up)

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