Those interest rate decreases borrowers are hoping for and savers are kind of dreading?
They’re already happening, even as the Bank of Canada continues to leave its benchmark overnight rate untouched. Mortgage rate relief has already started, and so has a marked decline in rates for guaranteed investment certificates.
Whether you’re a borrower, a saver or an investor looking for a lower-risk place to put money, now is the time to zero in on what’s happening with the interest rates that, well, interest you. Borrowers should understand the scope of rate relief available now, while savers and conservative investors have an opportunity to capitalize on rates that are slipping but still high by the standard of recent decades.
Some interest rates are directly connected to the Bank of Canada’s overnight rate and typically get adjusted as soon as 24 hours after the bank makes a move. Three key examples are variable-rate mortgages, lines of credit and various types of savings accounts. There is nothing to report on these fronts as of now. Check back on the next two rate-setting dates – March 6 and April 10.
Other rates are indirectly influenced by the overnight rate, but move independently. For example, the cost of fixed-rate mortgages.
“Five and three-year rates have steadily been decreasing in the last little bit, but they’ve sort of plateaued,” said Leah Zlatkin, a mortgage broker at MortgageOutlet.ca. “Shorter-term rates like the two year still seem to be on the downswing, so that’s very promising.”
We’re still in an abnormal rate environment where short-term borrowing costs more than borrowing for the longer term. One-year mortgages remain prohibitively expensive for most borrowers, but Ms. Zlatkin said there’s been more attention paid to the two-year term.
The rationale for a two-year term is the opportunity to renew at a point when rates will presumably be lower than now. A variable-rate mortgage seems the better vehicle for riding rates lower, but Ms. Zlatkin said current discounting on variable-rate mortgages is at mediocre levels.
As a result, it’s much more expensive to have a variable-rate mortgage right now than a fixed-rate mortgage of three to five years. A discounted three-year mortgage might go for 5.2 to 5.5 per cent at best, while a variable-rate mortgage could cost 6.25 per cent. Incidentally, the current three-year rate is down about 0.8 of a percentage point from the peak last fall.
Banks, credit unions and trust companies sell GICs to fund mortgages, so it’s no surprise that GIC rates have followed the decline in mortgage rates.
Mary Rygiel of Conservative Investors’ Services said top returns for five-year GICs have fallen almost a full percentage point in the past month to just below 5 per cent, although some banks or credit unions may offer 5 per cent if you have $100,000 or more to invest. Returns above 5 per cent remain widely available from alternative banks and credit unions for terms of one and two years.
Looking ahead, Ms. Rygiel expects the pace of decline to pick up when the Bank of Canada starts cutting its overnight rate. In an e-mail, she said the behaviour of GIC issuers with rate changes can be summarized as “slow to go up – quick to drop.”
Something else that may depress GIC rates is a subdued housing market. Without strong demand for mortgages, there’s less competitive GIC rate one-upmanship.
One-year GIC rates were as high as 6 per cent last year, but even today’s reduced returns look strong in a historical context. In spring 2019, you would have been lucky to find a 3 per cent one-year GIC.
Savings accounts from alternative banks have held steady at levels as high as 4 per cent, while high-interest savings account products designed for investors to buy and sell like mutual funds remain at 4.55 per cent or slightly more.
However, rates for popular exchange-traded fund versions of the high-interest account have dipped below 5 per cent and are now in the 4.8 to 4.9 per cent range. The background here is that these ETFs are adjusting to regulatory changes affecting the bank savings accounts where they park their money. Looking ahead, expect the overnight rate to dictate changes in the rate for these products.
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Rob Carrick