Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
If your mortgage floats with prime rate, the Bank of Canada just bought you another 35 to 77 days of rock-bottom interest costs.
On Wednesday, it decided to defer its first rate hike, likely until its March 2 or April 13 meeting. That’s despite polls showing a large majority of Canadians are more worried about rising consumer prices than rate increases.
But delaying the inevitable won’t spare borrowers for long. In his Q&A session on Wednesday, Bank of Canada Governor Tiff Macklem repeated a half dozen times that today marks a “significant shift in monetary policy.” He warned mortgagors to expect “a number” of rate hikes because inflation is “uncomfortably high.”
This is not new information. Rates don’t stay in the basement when inflation expectations are surging and the consumer price index is at its highest in nearly 30 years. Nonetheless, it’s interesting commentary from the guy who effectively controls variable rates.
As this is being written, bond traders are pricing in a 90-per-cent chance of a hike on March 2. Yes, those same traders were wrong this time, but timing markets isn’t a perfect science. They won’t be wrong for long.
The waiting game has two problems
High inflation is a fire that burns hotter if you wait to put it out. Deferring Canada’s first hike could require more and/or accelerated rate hikes, to bring inflation back to the central bank’s 2-per-cent target.
Why did the Bank of Canada kick the can down the road? Three possible reasons:
- It’s waiting for Omicron to subside;
- It’s waiting until we’re closer to its previously projected first-hike time frame, to preserve its credibility;
- It’s waiting for the U.S. central bank to act, which keeps our dollar lower and helps exports.
Delaying the inevitable also lets home prices continue to spiral. In many cases, people are still literally lining up to get into open houses. The central bank’s senior deputy governor, Carolyn Rogers, said on Wednesday, “housing activity will stay elevated for a while” because, among other things, rate hikes take time to filter through the system.
Meanwhile, many are scurrying into fixed rates
With financial markets projecting 175 to 200 basis points of rate increases over the next few years, “We’re getting a lot of inquiries about locking in,” veteran mortgage broker Ron Butler said. (There are 100 basis points, or bps, in a percentage point.)
And many have “very little grasp of what rate it may be,” he said. “Some seem to think it’s just the rate they have today.”
Finally, an open mortgage with a stellar rate and no strings
Yes, some people actually get variable mortgages thinking they can lock into a fixed rate at their existing variable rate. Talk about the mortgage adviser’s failure to educate the borrower. Worse yet, the actual rates people now get when locking in are around 3 per cent at major banks, far above the typical 1.5-per-cent variable rate.
Until recently, most mortgage applicants had been floating their rate. But once prime jumps 75-plus basis points or so, “there could be some panic,” such that “85 per cent” of borrowers start choosing fixed, Mr. Butler predicted.
Who’s right for a five-year fixed?
Most mortgage brokers are pro-variable, despite the rate risk ahead. Their assumption is that rates won’t soar, variable-rate prepayment penalties are lower and one’s average rate over five years should be better in a variable.
Jim Tourloukis, president of Verico Advent Mortgage Services, is one of those people. There are usually just two cases where a borrower should lean toward a five-year fixed, he said.
If the borrower is currently in a variable rate mortgage with a worse-than-average discount from prime – prime rate minus 0.5 per cent, for example – locking in might be the way to go, he said.
A longer-term fixed could also “make sense for those who understand the math behind not locking in, but are prone to emotion taking over,” Mr. Tourloukis said. Those folks, particularly borrowers with less ability to handle higher interest costs, may want to “set and forget” a deeply discounted fixed rate. That way, they’re less likely to lock in later – at the worst possible time.
Rate inflation continues
Mortgage rates are still on the up escalator, and we better get used to it. The lowest nationally available uninsured five-year fixed rose another five bps this week while a slew of shorter-term fixed rates jumped five to 10 bps.
The wider that fixed-variable spread gets, and it’s now the widest in more than a decade, the less chance a fixed will beat a variable over the next five years.
Rates are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. 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. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.
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Robert McLister