Prices are surging for all kinds for goods and services and that’s a problem. But the more salient problem for mortgage borrowers is that people think prices will keep surging.
Surveys continue to show inflation expectations near multidecade highs. Some are at record highs, including a just-released survey from the Federal Reserve Bank of New York. This all comes as North America grapples with an economic supply shock, unlike anything seen since the 1970s.
It’s no coincidence that Bank of Canada Governor Tiff Macklem admitted last week that inflation drivers “could be more persistent than we previously thought.” That’s about as alarming a statement as you’ll get from a central bank that is watching price pressures mount.
This all presents a future pocketbook problem for mortgagors, given inflation expectations are the single most important driver of interest rates. Hot inflation won’t last forever but the risk of above-normal inflation persisting longer is clearly higher than it was when our central bank first predicted that inflation would be “transitory.”
If consumers stop buying the bank’s “transitory inflation” story, Mr. Macklem and company have a problem. The BoC would potentially need to increase rates faster and more vigorously to counter those expectations.
‘Rate hike insurance’ remains cheap
Five-year government bond yields, which lead most fixed mortgage rates, peaked above 1.30 per cent on Wednesday, the highest since February, 2020.
Against a hotter-than-expected inflation backdrop, the appeal of floating mortgage rates dims. The value zone for risk-averse borrowers is, and has been, the “insurance” of a five-year fixed. That’s particularly true for those choosing a lender with reasonable prepayment penalties.
The lowest widely available five-year fixed rates are now at 2.09 per cent or less. That’s up about five basis points since my last report two weeks ago. (There are 100 basis points in a percentage point.) Rates like 2.09 per cent are a vanishing breed with bond yields at 20-month highs.
Here’s a look at the field of leading national mortgage providers, as of Wednesday:
Rates shown in the accompanying table are from providers that lend in at least nine provinces and advertise rates on their websites. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender.
Bank of Nova Scotia, which also owns Tangerine, dominates the uninsured rate market. One must wonder what the other big banks have planned to counter Scotiabank’s aggressiveness. Without something up their sleeves, the others risk ceding a material amount of market share, particularly since Scotia/Tangerine mortgages boast above-average flexibility relative to most competitors.
As usual, online mortgage brokers rule the default insured rate market. Insured broker rates remain at least five to 15 basis points lower than discounted big bank rates.
Similar to what I wrote last week, rate simulations show that uninsured five-year fixed rates at/below 2.09 per cent still outperform variable rates on paper. That assumes you hold the mortgage for five years, which many don’t.
This and that:
- Canada’s bond market continues to price in three Bank of Canada rate hikes next year and about six hikes (150 basis points total) in the next 36 months. That’s according to implied policy rates tracked by Bloomberg.
- Borrowers who can’t make up their mind between fixed and variable can always choose both. They just need a lender that supports “hybrid” mortgages. Scotia eHOME leads nationally in that department with an effective rate of just 1.69 per cent on a half-five year fixed/half-variable mortgage.
- The next rate-setting announcement for the minimum qualifying rate, or MQR, is slated for December, according to the Office of the Superintendent of Financial Institutions. With rates on the rise and inflation expectations becoming at least partly unanchored, OSFI could potentially bump up the MQR to protect the financial system from overleveraged borrowers. OSFI’s MQR serves as the minimum rate that most new uninsured mortgage borrowers must prove they can afford. “As for the MQR for insured mortgages, it continues to be the purview of the Department of Finance,” OSFI says.
- Mortgage volumes rocketed almost 44 per cent in the first half of this year, “fuelled by a rise in demand for homes” and “low interest rates,” TransUnion says. Among Gen Z borrowers, mortgage originations posted astonishing growth, almost doubling year-over-year. Don’t bet on the mortgage binge continuing at this pace in 2022.
Robert McLister is an interest rate analyst, mortgage planner and contributing writer for The Globe and Mail. You can follow him on Twitter at @RobMcLister.