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Welcome to the latest edition of Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.

Variable mortgage rates are so low it’s almost as if lenders are bribing you to get one.

At 1.35 per cent or less on uninsured mortgages, the lowest nationally available floating rates are as much as 127 basis points below five-year fixed rates. That’s the widest fixed-variable divergence since 2011. (There are 100 basis points in a percentage point.)

Most don’t expect floating rates to move higher until the Bank of Canada’s next rate hike, which financial markets currently anticipate in March.

But the unparalleled discounts we’ve been seeing are already beginning to shrink. Some of Canada’s larger lenders, like Royal Bank of Canada, for example, have reduced discounts as much as 15 basis points in recent weeks. That results in about $2,000 more interest over five years on a typical $300,000 mortgage.

Driving this is the fact that it’s getting more expensive for lenders to fund a variable-rate mortgage. Without getting too much into the weeds, when interest rate volatility goes up – like it has been – it gets more costly for banks to lend.

Simultaneously, bankers’ acceptance yields, a very rough proxy for the base funding cost of a floating-rate mortgage, have risen about five basis points in the past eight weeks. That’s normal when investors start anticipating higher borrowing costs, and banks have now begun pricing this into variable rates. Expect variable-rate discounts to shrink further ahead of the first rate hike.

Like most other products, mortgages are supply and demand driven. The unusual upfront rate savings of today’s variables is a plump and juicy carrot for mortgagors trying to keep their payments low. Some lenders are taking advantage of that demand to improve their profit margins slightly.

The takeaway

If you plan to get a new variable-rate mortgage before April, don’t wait too long to lock in your discount from prime rate. You can do that three to four months ahead of your expected closing date, depending on the lender.

Rates on default-insured variables – which apply to home buyers with less than a 20-per-cent down payment – are an interesting exception: The discount from prime for the lowest insured variable rate has actually got bigger in recent weeks.

Online brokers in provinces such as Alberta, British Columbia and Ontario are still giving away insured variables at record-low rates as cheap as 0.87 per cent. These insured rates use a different source of funding and such lenders haven’t had to raise their pricing – yet.

Keep in mind, most of the best broker-offered insured deals are adjustable-rate mortgages (ARMs), not variable-rate mortgages (VRMs). Unlike VRMs, ARM payments increase when the prime rate increases. But that also ensures you pay more principal with each payment, reducing your mortgage balance faster. With a variable, your payment is typically adjusted higher at renewal to ensure the mortgage is paid down according to your original amortization.

Lowest nationally advertised mortgage rates

TERMUNINSUREDPROVIDERINSUREDPROVIDER
1-year fixed2.44%RBC1.99%True North
2-year fixed2.08%Scotia eHOME1.99%Radius Financial
3-year fixed2.18%Scotia eHOME2.13%Scotia eHOME
4-year fixed2.33%Scotia eHOME2.28%Scotia eHOME
5-year fixed2.54%Tangerine2.24%Marathon
10-year fixed3.30%First National2.79%Nesto
5-year variable1.34%Multiple0.99%HSBC
HELOC2.35%TangerineN/AN/A

As of Nov. 17.

Rates shown in the table are from providers that lend in at least nine provinces and advertise rates on their websites. Insured rates apply to those buying with a down payment of less than 20 per cent, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums.

This and that

  • The bond market is now pricing in about seven 25-basis-point rate hikes by the Bank of Canada in the next 24 months, starting in March, according to Refinitiv Eikon.
  • Inflation just climbed to a new 18-year high of 4.7 per cent in October. But the likes of Capital Economics maintain “there is still little sign of sustained inflationary pressures” that would cause the Bank of Canada to accelerate its rate-hike timetable.
  • Scotiabank continues to dominate uninsured mortgage rates. Through its eHOME division and its Tangerine subsidiary, Scotia is advertising the lowest nationally available two- through five-year fixed and variable rates. Scotiabank is clearly trying to edge its Big Six bank competitors in capturing customers who don’t like to negotiate.
  • Based on Canada’s average home price – now $716,585 according to the Canadian Real Estate Association – the minimum down payment would be 31 per cent bigger to buy a home with a mortgage, compared with just 12 months ago.
  • If you’re using a mortgage broker, odds are you’re using one from Canada’s two largest mortgage broker companies, Dominion Lending Centres Inc. (DLC) or M3 Group. These industry titans control four out of five brokered mortgages and are in a heated battle to consolidate the brokerage industry and beat the other in scale. So far, DLC seems to be winning with a just-announced $75-billion in funded mortgages over the 12 months ended Sept. 30. M3 reported $67-billion in funded mortgages over the same period.

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.

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