Just as the housing market was primed for higher interest rates, we get the biggest one-week drop in five-year government bond yields since the oil crash of January, 2015.
It happened Tuesday, just weeks after Toronto-Dominion Bank shook the market with the largest hike to posted five-year fixed rates in eight years.
There’s always something changing the rate narrative. If you’re out there mortgage hunting, here’s the very latest.
Fixed rates do a 180 (at least temporarily)
Less than two weeks ago, bond yields hit a seven-year high. Yields, which lead fixed mortgage rates, have since collapsed.
This “breakout fakeout“ has left thousands of mortgagors questioning their recent decision to lock in.
It’s also put some big grins on the faces of savvy bankers. When they make much publicized hikes (such as TD’s 0.45 percentage points in one day) they influence borrower psychology. Like cowboys driving cattle into a stable, big banks are great at driving borrowers to lock in.
It’s all just the latest instalment of “don’t pick a term based on what’s happening this month.” The rate market never moves in a straight line. As a mortgage shopper, there are headfakes galore. All you can do is ignore them and choose a term that suits your five-year plan, financial security, psychology and research – not current news headlines.
Okay, but where do fixed rates go now?
This week’s waterfall in yields should drive down the lowest fixed mortgage rates. In fact, we’re already seeing cheaper pricing – about 0.05 to 0.10 of a percentage point lower – from smaller lenders on Canada’s most popular term, the five-year fixed.
Now, we’ll wait and see how things play out in Europe. Italy’s political and economic struggles have investors on edge. Traders have rushed to buy safe assets (such as triple-A-rated bonds), and that could keep yields – and hence, fixed mortgage rates – lower in the near term.
If you’re wondering what it would take for fixed rates to make new long-term highs, keep your eyeballs on the five-year government yield. It would need to exceed 2.35 per cent for that to happen, a threshold that is now meaningfully above current levels.
What the Bank of Canada said
Our central bank wants to raise the price of money to keep inflation at bay. This is crystal clear from its statement on Wednesday. But it pledges to do so only “gradually.”
Okay, that much is old news. What people really want to know is, how high will rates go?
Predictions are undependable, but for what it’s worth, bond traders think rates will settle about four rate hikes higher at the end of this rate cycle. In other words, about one percentage point higher, give or take. (If you’re curious, that’s based on implied future rates – to be precise, three-year overnight index swap rates, as tracked by Bloomberg.)
In addition, recently we saw long-term bond yields invert – briefly – for the first time in more than a decade. All of this suggests that the market is quite comfortable with inflation (longer-term bonds having a much higher sensitivity to inflation risk), and hence interest rates, staying low long-term.
The best plays now
Floating rates are the flavour of the year, owing to their growing discount from five-year fixed rates.
In fact, the proportion of borrowers with big mortgages relative to home values that are choosing variable rates is up 175 per cent in the last few years, Canada and Mortgage Housing Corp. reported Tuesday.
If you’re fine with floating your mortgage, take advantage of variable rate sales while you can. Most of the prime-minus-1-per-cent specials that made news recently are scheduled to end either Thursday (end of day) or June 4 at the major banks. They will persist through mortgage brokers and a few smaller lenders thereafter. Canada’s current prime rate is 3.45 per cent, which makes the big banks’ variable rates (for new borrowers) 2.45 per cent.
If you’ve already got a variable but your rate isn’t so hot, calculate your rate savings by switching lenders. A lot of people are happily paying penalties these days in order to break their mortgage for a lower rate elsewhere.
One last note: Some banks are refusing to offer prime minus 1 per cent to their existing customers, only their new ones. May shame befall them! Clearly, loyalty doesn’t get you what it used to.
Robert McLister is a mortgage planner at intelliMortgage and founder of RateSpy.com. You can follow him on Twitter at @RateSpy.