Donald Trump might have just made this month the best time ever to get a five-year fixed mortgage. The president-elect's effect on the rate market could reinforce trends that are already making mortgages more expensive. Here's why:
The Donald is bullish for rates
U.S. interest rates have surged as Mr. Trump's trillions in expected infrastructure spending and tax cuts, protectionist job policies and deregulation will fuel economic growth, and hence inflation. Bondholders dread high inflation.
They also dread an unwieldy U.S. debt load, default risk and comments made by Mr. Trump, such as: "I would borrow, knowing that if the economy crashed, you could make a deal."
With bonds coming off their biggest bull market in history, all of this has traders urgently selling before their profits evaporate. As bond prices fall, U.S. rates are surging, and they could keep climbing longer-term.
With Canada so linked to the U.S. economy, our rates are flying too. The billion-dollar question is whether Mr. Trump erects trade barriers with Canada that stunt our growth. That would keep a lid on rates. But with Canada being a key market for U.S. goods and services, a major source of commodities and U.S. investment, and with our wages being on par with those in the United States, we're much less of a threat to Mr. Trump than Mexico.
In any event, keep an eye on Canada's five-year bond yield, now 0.87 per cent. Most mortgage rates are tied to it. If it breaks definitively above 1 per cent, today's record-low five-year rates may not be seen again for months, if not years.
Covert rate hikes
The Department of Finance has flung a slew of regulations at mortgage lenders. It's imposed higher capital requirements, limits on selling mortgages to investors, reduced access to default insurance (which investors demand when buying mortgages), higher fees and insurance premiums and so on and so on.
By doing all his, regulators are slyly making lending more expensive behind the scenes. Lenders are passing these costs on to borrowers, like we saw last week with TD Canada Trust's surprise hike to its mortgage prime rate. Expect more such stealth rate hikes in the next 18 months, especially if Canada Mortgage and Housing Corp.'s new lender-loss-sharing proposal gets approved (and you can bet it will).
There's a fire sale on fixed rates
As of today, the average discounted five-year variable tracked by RateSpy.com is 2.25 per cent. But you can fetch a five-year fixed rate for a juicy 2.19 per cent or less. In fact, some insured rates are below 2 per cent.
Could the Bank of Canada cut rates again? Sure. But that doesn't mean lenders are going to drop their prime rate (much, if at all).
So a variable at a similar rate to a long-term fixed gets you maybe 0-30 basis points of potential benefit if rates drop again, in exchange for God knows what upside rate risk in a Trumpian economy.
Most of the best mortgage rates in the country come from mortgage finance companies. These non-bank lenders must insure their mortgages in order to sell them to investors. After Nov. 30, they'll be forced to hike rates on a variety of mortgages as the Finance Department bans insurance on certain loan types. This could affect folks shopping for a refinance, amortizations over 25 years, $1-million-plus mortgages or rental financing.
Those with above-average debt loads and at least 20 per cent equity will also see their rate options shrink. That's because, on Nov. 30, insured lenders must start testing borrowers to see if they can afford a payment based on the Bank of Canada's five-year posted rate, currently 4.64 per cent. This leaves banks and credit unions – most of which have higher rates – as the main source of financing for folks with higher debt-to-income ratios. So if you're thinking of consolidating debt, get off the fence now.
Unless our economy seriously underachieves, despite Mr. Trump's economic renaissance, we might look back on this month as one of the best times in history to get a five-year fixed rate. And if it's not the best time, it will be right up there.