Canadian bond yields made a two-year low on Thursday and that’s relevant for mortgage shoppers.
For one thing, plunging bond yields are driving down borrowing costs. For another, bond prices and derivatives are a leading indicator of future mortgage rates. And based on those forecasts, you won’t need sunglasses. Mr. Market implies that Canada’s foreseeable economic future isn’t so bright.
The good news
At least mortgage shoppers with job security have something to applaud. With the Federal Reserve standing ready to cut rates as needed, the Bank of Canada is going nowhere fast on its policy rate, apart from sideways and possibly down.
That said, few can be oblivious to rate risk. If U.S. President Donald Trump were to announce a trade deal with China, finalize the trade deal with Canada and Mexico, and refrain from any other economically destabilizing tweets, then economic hopes and interest rates could surge.
Could those rates exceed 2018′s highs? Unlikely, at least this year or next. But predicting rates is like predicting which path a chicken takes to cross the road.
Where the deals are
Remember that big run-up in interest rates over the past few years and fears of a prime rate north of 5 per cent? Well, rates are almost all the way back down to when we started that momentous climb in the summer of 2017.
When mortgage pricing gets this low, it starts to feel like every term is on sale, but some terms are clearly better values than others.
Here’s a quick sampling of the deals du jour.
The two-year fixed
DUCA, a Canadian credit union, launched a 1.99-per-cent, two-year fixed term this week. It’s for people buying a home with less than 20 per cent down (that is, a default insured mortgage). For someone who can handle the potential of higher rates in 2021, this is the term to beat. The Bank of Canada would have to cut three times in the next year for you to be better off in a deep-discounted variable. And if rates miraculously pop higher, you’re protected for two years. Just remember that you still have to pass the federal stress test and prove that you can afford a payment based on a 5.34-per-cent rate.
The four-year fixed
If five-year terms aren’t your thing, Scotiabank’s got a hot new 2.74-per-cent, four-year fixed rate for purchase financing. It’s the lowest four-year fixed rate in Canada since 2017. For this price, you get one more year of rate protection versus a three-year fixed, and more flexibility to refinance earlier than a five-year fixed. The rate is available exclusively through the bank’s new eHOME online website. If you want more personalized advice or need to renew or refinance, it’s available through branches and Scotiabank advisers for 2.79 per cent. This marks the first time the bank has ever advertised special rates for people who apply and manage their mortgage entirely online. Times, they are a changin’.
The five-year fixed
An overwhelming number of borrowers flocked to five-year fixed terms this year. It’s not hard to see why, with most variable rates exceeding fixed rates. If you want to lock in, you can now find insured five-year fixed mortgages with effective rates in the 2.6-per-cent range or below, and uninsured in the 2.9-per-cent area. The venerable five-year fixed remains the best-priced “set-and-forget” mortgage term in Canada. Yes, even better than the term I’m about to talk about next.
The 10-year fixed
I’ve never been one to trumpet decade-long mortgages. Their penalties are too atrocious if you break the mortgage in the first five years and Canada’s arguably in a low-for-long rate cycle – thanks to well-managed monetary policy and enduring disinflationary trends.
But what if that thinking is all wrong? What if economic forces out of nowhere spike inflation such that rates rocket higher in five years? That’s the last thing I’d predict, but I don’t predict – and neither should you.
So, if keeping your payment predictable for a decade is paramount to playing the odds (the odds show you’re better off in a shorter or variable term over the long run), then check out HSBC’s 10-year rate. It’s still at a record low of 2.99 per cent for those purchasing with less than 20 per cent down. And after five years, you can break it – if you sell or want to refinance at best rates – with a three-month interest charge.
Robert McLister is a founder of RateSpy.com and intelliMortgage. You can follow him on Twitter at @RateSpy