Welcome to Mortgage Rundown, a quick take on what’s happening in Canada’s mortgage rate landscape from mortgage strategist Robert McLister.
Where are those higher rates?
Fixed mortgage rates were supposed to be higher by now. The popular narrative was for a recovery-led upswing to boost bond yields and mortgage costs by this fall. If you’re wondering why that hasn’t happened yet, blame it on the wave – COVID’s fourth wave.
But odds are that higher rates aren’t derailed, they’re just delayed. Expectations of average core inflation drive interest rates, and average core inflation just surged – again. The latest data show it rising to 2.57 per cent thanks to the biggest supply disruption in decades. Economists claim it’s near a peak, but if it tops 2.73 per cent, that’ll be a 30-year high.
It’s not inflation today we have to worry about, however. It’s inflation one to two years from now that determines what you’ll pay to borrow. In fact, bond yields – a leading indicator of mortgage rates – anticipate price level increases. Yields always jump beforehand if inflation seems threatening.
Here’s what that means in English: If you’re hoping today’s mortgage rates don’t rise further, you’re hoping that Canada’s five-year bond yield stays below its 1.07-per-cent March high.
But we also have to be real. As the recovery takes hold, rates should ultimately shoot higher – despite the Bank of Canada’s mantra that above-target inflation is “transitory.”
Mortgage rates creep lower
As Canada awaits a sustained recovery that seems as if it’ll never come, banks are getting slightly more generous with their mortgage pricing. The lowest discretionary five-year fixed rates have dropped 0.05 percentage points in recent weeks, to 2.09 per cent or less.
“Discretionary rates” are unadvertised bank rates available to qualified borrowers, typically after some negotiation.
By contrast, the lowest discretionary variable rates are in the neighbourhood of 1.29 per cent, or the prime rate minus 1.16 per cent.
That upfront saving of 0.8 of a percentage point versus five-year fixed rates is awfully tempting, particularly if you think rising prices and rising rates will burden over-leveraged consumers and slow the economy. If that happens, the uptick in variable rates could be limited to four or five rate hikes, which is exactly what the bond market is pricing in for the next three years.
Lowest nationally advertised mortgage rates
In the accompanying table, 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 mortgage rates apply to all other owner-occupied financing for well-qualified borrowers.
Fix or float?
If the above scenario pans out and Canada’s overnight rate peaks around 1.5 per cent, the math is clear. Based on rate simulations, variable mortgages win. According to Bloomberg data, they’ll win based on five-year projected interest cost, and they’ll win on penalties. Variable-rate prepayment penalties are generally cheaper than penalties on fixed terms.
But hypotheticals rarely unfold as envisioned. Much could change before the second half of next year, when the Bank of Canada projects its first rate hike. Take inflation expectations of Canadian businesses, for example. Currently, those expectations are the highest on record. If they worsen, rate-hike risk increases, especially if we get: a) outsized wage inflation, and/or b) “demand-driven” inflation from an uptick in consumer spending.
If any of this worries you, and it probably should if you’re less financially resilient, then five-year fixed rates of 1.99 per cent or less are still a historical bargain, particularly if you choose a fair-penalty lender.
New switching option
Bank of Nova Scotia is slaying big bank competitors with its “eHOME” online mortgage. It’s got the easiest application, free appraisals and the best big bank rates I’ve seen on the web.
Note: You have to log in to shop its rates, but there’s no credit check required, unlike other intrusive bank applications.
Now, after two years, Scotiabank has opened up eHOME to people switching a mortgage from another lender. And at the time I’m writing this, its uninsured switch rate is 1.99 per cent for uninsured five-year fixed mortgages, plus $500 cash back for switch costs. By comparison, the lowest five-year fixed rate advertised by other Big Six banks is 2.34 per cent.
To switch to Scotiabank using eHOME, you must be creditworthy, have 20-per-cent or more equity (that is, 80 per cent loan-to-value or less) and the mortgage must be on an owner-occupied home. Unlike most banks, you can do everything online. The only in-person visit is when you sign the closing documents. If you do need help, you can phone or message your dedicated mortgage adviser, who’s not paid by commission – unlike most mortgage specialists.
However, eHOME isn’t for everyone. For one thing, you can only get a collateral charge mortgage, which some don’t like because of the extra switching costs at maturity. (A collateral charge mortgage allows you to reborrow without having to use a lawyer to re-register the mortgage.) Second, big banks – including Scotiabank – have potentially worse interest rate differential penalties than other lenders. That’s a serious factor if you go fixed and then break the mortgage early.