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The cost of borrowing is high, but central bankers say we’re close to the finish line on rate hikes.Abbie Parr/The Associated Press

As mortgage borrowers, we all got spoiled by low rates over the past decade.

The cost of borrowing is now almost double what it averaged in the 13 years between the global financial crisis (GFC) and when rate hikes started last year.

Take the average variable rate for example. Prior to a year ago, floating rates had averaged 2.35 per cent after the GFC.

Today they’re double that. Variable rates now start at 5.5 per cent (default-insured) to 6.1 per cent (uninsured).

Same goes for five-year fixed rates. They too are almost double their average after the GFC.

Nosebleed rates are enough to give cash-strapped homeowners anxiety attacks. Most folks have no idea where rates will be when they renew this year or next.

But the bond market thinks it knows

Central bankers say we’re close to the finish line on rate hikes. Just yesterday, the most powerful banker in the world, U.S. Federal Reserve chair Jerome Powell, confirmed that his economy is “now in disinflation.”

Canada’s bond market liked the sound of that, given the strong link between U.S. and Canadian inflation. Derivatives traders, who bet hundreds of millions daily on the Bank of Canada’s rate direction, pushed down our rates as a result. Markets now imply one or two prime rate cuts by December.

As a borrower, relying on the market’s outlook is a gamble. No one can predict global events with any certainty. But it’s not quite casino gambling. Notable research has shown that certain market-based indicators do have predictive power with respect to central bank rates, depending on how far out you look. In fact, it’s materially better than a coin flip and superior to the economist consensus.

At the very least, while bond market derivatives can’t be relied on for precise rate timing and rate change magnitude, they’re a reasonable indicator of rate direction at times like this – when markets are pricing in more than 200 basis points (bps) of cuts over the next two years. (A basis point is 1/100th of a percentage point.)

Let’s hypothetically assume things pan out as bond investors expect. If they do, here’s roughly how mortgage renewal rates might look if you have an uninsured five-year mortgage which is coming up for renewal.

If you renew in six months, market pricing implies a:

  • 4.68 per cent five-year fixed rate, 21 bps lower than today
  • 6.1 per cent five-year variable rate, 0 bps lower than today

If you renew in 12 months, market pricing implies a:

  • 4.41 per cent five-year fixed rate, 48 bps lower than today
  • 5.53 per cent five-year variable rate, 57 bps lower than today

If you renew in 18 months, market pricing implies a:

  • 4.38 per cent five-year fixed rate, 51 bps lower than today
  • 4.59 per cent five-year variable rate, 151 bps lower than today

If you renew in 24 months, market pricing implies a:

  • 4.36 per cent five-year fixed rate, 53 bps lower than today
  • 4 per cent five-year variable rate, 210 bps lower than today

These market-implied rates are based on today’s lender profit margins. In actuality, lenders will get likely more competitive once they see how the potential upcoming recession pans out. Also, if your mortgage is insured, your renewal rates will be anywhere from 10 to 50 bps lower than uninsured rates.

Of course, for all anyone knows the world could see a dangerous turn of events with Russia, China, the pandemic, the U.S. debt ceiling, [insert your favourite financial market disaster here].

To the extent such black swans drive inflation higher, rates could do the exact opposite of the above. That’s not what savvy investors think will happen, but you always need a backup plan in place anyway – in case rates do go the wrong way.

McLister: This week’s lowest fixed and variable mortgage rates in Canada

Central banks should stick to ‘higher for longer’ interest rate approach to tackle inflation, IMF says

And if you expect to have a mortgage for years and absolutely can’t afford to gamble, don’t. Lock in at least part of your borrowing for three-plus years – regardless of what the market is telling us.

Lowest nationally available mortgage rates

1-year fixed5.74%Ratehub4.64%QuestMortgage
2-year fixed5.54%QuestMortgage4.64%QuestMortgage
3-year fixed5.04%HSBC4.64%QuestMortgage
4-year fixed5.14%QuestMortgage4.44%Ratehub
5-year fixed4.89%HSBC4.39%Ratehub
10-year fixed5.94%HSBC5.14%Nesto
5-year hybrid5.50%HSBC6.06%Scotia eHOME
HELOC *6.70%HSBCn/an/a

Source: Robert McLister; data as of Feb. 2

* Home equity line of credit

Robert McLister is an interest rate analyst, mortgage strategist and editor of You can follow him on Twitter at @RobMcLister.

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