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If you were renewing your mortgage right now, how would you plan for upcoming rate hikes?

Would you gamble on a variable or short term, like a one- or two-year? Lock in for five-plus years? Or split the difference with a three- or four-year term?

I asked three of Canada’s top economists those very questions. Below are highlights from what they said.

Benjamin Tal, CIBC World Markets

  • “I think that any borrower has to assume that the Bank of Canada takes rates to 3 per cent. Even if it doesn’t happen, at this point you have to assume that.
  • “The speed of the rate hikes will lead to a notable slowing in the economy, with a risk of a recession. So, it’s reasonable to assume that rates will be going down two to three years from now.
  • “Therefore, one option is to take a two- or maybe three-year fixed (to be safer) – and relax during the hiking cycle, and then maybe switch and ride the variable rate on its way down.”

Ksenia Bushmeneva, TD Economics

  • “…Our expectation [is] that the overnight rate will reach 2.25 per cent by the end of this year, compared to only 1 per cent currently.”
  • “Variable rates can even [potentially] rise above the five-year fixed for some period of time.”
  • As rates rise, those in a variable rate with fixed payments will see their amortization extended, as they’ll pay more interest and less principal. “However, even this can’t be accurately predicted because rates may eventually decline, and the opposite will happen, offering an option to ‘catch up.’”
  • “[It’s] really about a person’s risk tolerance and whether they prefer greater predictability on their mortgage schedule.”
  • “Five-year fixed rates are high at the moment because financial markets have already priced in the expected movement in the overnight rate.”
  • “Canadians tend to think in terms of variable or the popular five-year rate, but other options, like the three-year fixed rate, is slightly lower than the five-year. [It] offers an option to renew sooner if you believe rates will be headed in the other direction in a few years’ time.”

Robert Kavcic, BMO Economics

  • “We see another 100 bps of tightening through July, 125 bps by year-end, and 175 bps by mid-2023. Depending on your exact terms, that should leave variable rates just above 4 per cent by this time next year.”
  • “There is a real risk of a downturn – and eventual easing of rates – in the latter half of the upcoming five-year period. Considering that, and the fact that five-year fixed rates are already around 4 per cent, the easy choice to lock in has probably passed by for this cycle.”
  • “... I would be riding the market with a variable rate at this point, but fully budgeting for the fact that the rate I’m getting today will already be 100 bps higher by midsummer.”
  • “If you’re pushing affordability limits, you’ll want to more seriously consider a fixed rate, a variable-rate product with a set payment feature or, in the case of a new buyer, a lower overall purchase price – the market is balancing quickly, so there’s no urgency.”
  • “The market is smart, and is usually good at setting five-year rates at a level that reflects expectations for future variable-rate movements. So, rather than trying to pick and choose what will be least expensive – which can be hard when the market is priced to reflect expected changes – it is usually a personal choice.”

Each economist rightfully cautioned that such commentaries aren’t meant to be recommendations. Mortgage choice is highly personal, hinging on your individual finances and risk tolerance. Furthermore, unexpected inflation developments can radically change these outlooks.

Broker watchdog eyes private lending

People with horrible credit, extreme debt ratios and/or no proof of income are often forced to borrow from private lenders. And that’s far riskier than borrowing from a bank.

Private lenders have much higher interest rates, costlier fees, occasionally onerous contractual terms, a lower likelihood they will renew borrowers, and hair-trigger foreclosure tendencies if you miss a payment.

So effective April, 2023, the Financial Services Regulatory Authority of Ontario (FSRA) is limiting new mortgage brokers to dealing only with lenders approved by Canada Mortgage and Housing Corp., unless they have a special licence and training.

It’s the first provincial regulator to limit brokers like this and it’s a long time coming. It was prompted in part by audits that found a minority of brokers didn’t fully understand a private lender’s restrictions, but sold people the mortgage anyway. In other cases, brokers were unable to prove why their private lender recommendation was suitable for the borrower. Occasionally, the broker was the lender, but didn’t disclose this to the borrower until the last minute.

Huston Loke, FSRA executive vice-president of market conduct, is no fan of nondisclosure. “We think it would be best practice for borrowers to know who they are dealing with on the other side,” he says. Rightly so.

HSBC goes sub-2-per-cent

Rates that start with a “1″ are back. HSBC went against the grain this week, trimming its variable rates by 5 bps and bringing its default insured variable rate to just 1.99 per cent (prime minus 1.21 per cent) – or 2.39 per cent on refinances. Both those rates lead all national lenders. Better yet, HSBC’s variable is fully open after three years.

Lowest nationally available mortgage rates

TERMUNINSUREDPROVIDERINSUREDPROVIDER
1-year fixed3.14%RBC2.99%True North
2-year fixed3.39%RBC3.29%True North
3-year fixed3.75%RBC3.59%Radius Financial
4-year fixed3.99%Alterna Bank3.79%Radius Financial
5-year fixed4.04%Alterna Bank3.89%Multiple
10-year fixed4.64%HSBC4.24%Nesto
Variable2.39%HSBC1.99%HSBC
5-year hybrid3.27%HSBC3.39%Scotia eHOME
HELOC3.05%HSBCN/AN/A

As of May 4.

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.

This & That

  • Yields slide: Canada’s five-year bond yield dove 9 bps on Wednesday, following U.S. rates lower. The unexpected drop came after the U.S. Federal Reserve hiked its key rate 50 bps and projected a “softish” economic landing. This portends at least a short-term top for fixed mortgage rates.
  • Positive for consumers: Credit analytics company FICO has rolled out its Open Access program in Canada. (It’s been in the U.S. for years.) FICO says no mainstream mortgage lenders are signed up yet but once they do, mortgage customers will see the exact score lenders used to approve or deny them, for free. Free credit scores available today are often misleadingly different from the actual score used by mortgage lenders.

Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from Robert McLister, an interest rate analyst and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.