Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
per week
for first 24 weeks

Enjoy unlimited digital access
Enjoy Unlimited Digital Access
Get full access to
Just $1.99 per week for the first 24 weeks
Just $1.99 per week for the first 24 weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(}function setPanelState(o){dom.root.classList[o?"add":"remove"](,dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Houses in downtown Toronto March 27 2014.

Fred Lum/The Globe and Mail

It has become a lot tougher to make sense of mortgage rates in the past few weeks.

With Canada in the midst of economic misfortune (the decimation of its oil industry), inflation expectations are falling. That usually leads to a drop in mortgage rates. But in today's bizarro world, the usual is not happening.

What we're actually seeing is banks moving rates up. In the past week alone, advertised mortgage rates have jumped 0.10 to 0.15 percentage points at our Big 6 banks. That has surprised and confused not only borrowers, but many mortgage professionals.

Story continues below advertisement

What's behind it

If you're trying to make sense of it all, the first thing to understand is why banks hiked rates in the first place. It's a combination of six things, say lenders:

1. Rising short-term rates;

2. Investors demanding higher yields from mortgage lenders;

3. Provision for higher potential mortgage losses;

4. Preparation for potentially falling rates (which hurts bank margins);

5. Less demand from mortgage investors;

Story continues below advertisement

6. Preparation for upcoming regulatory changes, which will make lending more expensive.

What happens next

The reasons above will likely keep variable-rate discounts skimpy for the foreseeable future, at least at the major banks.

For fixed rates it's a different story. Unlike variable rates, which are funded by short-term debt and deposits, the cost of fixed-rate mortgages is tied to the bond market. That's good news for mortgage shoppers because bond yields are near all-time lows.

For now, cheaper funds in the bond market are offsetting the six factors above. That's why we're seeing lenders trim fixed rates as we speak. This doesn't rule out higher rates down the road, but it does mean that you don't have to panic about locking in.

Where the bargains are

Story continues below advertisement

Last September you could walk into any bank and get prime minus 0.55 per cent on a variable-rate mortgage. Nowadays, you'd be lucky to get prime minus 0.25 per cent.

If there's one piece of advice I can offer you, it is this: Ignore variable rates worse than prime minus 0.50 per cent. They're just not worth it. Variable-rate lovers are better off in a one-, two- and three-year rate. (This assumes you're getting a new mortgage. If you already have a great variable rate, like prime minus 0.75 per cent, hold on to it like a winning Powerball ticket.)

Choosing a variable at prime minus 0.50 per cent (i.e., 2.20 per cent) or worse means you'll likely pay more, even if the Bank of Canada cuts its key lending rate to zero. The reason: Shorter terms have much better rates and banks probably won't pass along more than 60 per cent of any Bank of Canada rate cut – assuming the past two cuts are a guide.

Knowing this, it's easy to model how different mortgage terms perform in that scenario. Let's assume, for example, that the Bank of Canada responds to the current economic risks by slashing its overnight rate by one-half percentage point. Then, two years later, the economy perks up and rates jump 1.5 points.

Mathematically speaking, which term wins in that situation?

Given a well-qualified borrower, a 25-year amortization and current mortgage rates, the answer is a one-year fixed.

Story continues below advertisement

The one-year edge

One year rates should perform best in this environment for four reasons:

1. At 1.99 per cent, give or take, they're the cheapest rate in the market (and equivalent to prime minus 0.71 per cent);

2. If rates fall as many expect, you'll potentially renew even lower in eight or nine months (I say eight or nine months because most lenders let you hold a new rate for 90-120 days);

3. Thanks to the economic cataclysm occurring in commodities, your renewal risk is limited – i.e., there's very little chance of significant rate increases in eight to nine months;

4. A one-year term provides maximum flexibility because you can renew into any other term and any other mortgage type, depending on the rates and your personal circumstances at the time.

Story continues below advertisement

Things to watch out for

Mortgages are like gloves: One does not fit all. If you do opt for a one-year term, keep three things in mind:

1. Your lender may not offer you a great deal on renewal, forcing you to change lenders;

2. If you're switching lenders, find one that covers your legal, appraisal and title insurance fees. Note: That's not usually possible if you have a secured line of credit;

3. Unless you need to borrow more within 12 months, avoid "collateral charge" mortgages, which make it more expensive to switch lenders at renewal.

Short-term mortgages are best suited to those with good credit, a reasonable debt load and stable, provable income.

Story continues below advertisement

By contrast, you may need the security of a longer fixed rate, or want a rate you can set and forget for four to five years (renewing does take three or four hours of your life, after all). Or maybe you simply can't qualify for a one-year rate, since lenders make you prove you can afford payments based on the posted five-year rate (currently 4.64 per cent).

In my case, I make regular sacrifices to the mortgage gods, thanking them for the prime minus 0.80 per cent variable my wife and I got last September. Sadly, they don't make those any more, but one-year terms are the next best thing.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of You can follow him on Twitter at @RateSpy

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to If you want to write a letter to the editor, please forward to

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies