Fixed mortgage rates are once again on the rise after Canada’s 5-year bond yield reached a three-year high earlier this month.
Brokers and mortgage lenders, including the Big 6 banks, have been hiking fixed mortgage rates in recent weeks, bringing the average uninsured rate closer to the 3% mark.
“There’s a good chance uninsured 5-year fixed rates will all be above 3% by early March if the 5-year yield moves towards 2%, as expected,” rate analyst Rob McLister told CMT. “That said, rates could take a temporary detour if investors pour into bonds in the wake of a geopolitical crisis (i.e., Russia’s invasion of Ukraine).”
Just six months ago, uninsured 5-year fixed rates were averaging closer to 2.20%.
For every 10-bps of rate increase, the monthly payment for 5-year rates increases about $5 per $100,000 of mortgage debt, McLister noted.
In recent weeks, 5-year insured mortgage rates (those requiring less than 20% down payment) have been rising at a faster pace compared to uninsured rates, with the spread between the two narrowing to about 10 bps.
Fixed vs. variable
The biggest question on the mind of most borrowers is whether they should opt for a fixed or variable rate mortgage.
The fixed-variable rate spread is now at the widest that we’ve seen since 2010. For insured mortgage rates, that spread is now at 170 bps.
So, what are borrowers to do? Should they go fixed or variable?
McLister offers the following considerations:
- What’s your five-year plan? Do you have new kids on the way, a job transfer, improving income, a potential divorce, potential illness? “These are examples of things that alter your mortgage needs,” McLister says.
- How’s your liquidity? How much budget leeway and/or liquid assets do you have if borrowing costs surge 200+ basis points?
- How likely are you to re-qualify? If you needed to, could you easily get approved for a new mortgage three to four years from now?
- What’s your state of mind? Would you rather pay a premium to avoid rate risk?
After answering these questions, is there a clear winner between fixed vs. variable?
“There’s too much uncertainty around inflation to make any definitive calls on term selection,” McLister says. “That’s why hybrid mortgages (50% fixed / 50% variable) are compelling here. They cut upside rate risk 50%, provide beneficial rate diversification and can be had for as low as 2.17% (uninsured).”
For Dave Larock, a mortgage broker with Integrated Mortgage Planners, the edge is still slightly with variable rates. Even though futures markets are expecting the fixed-variable spread to disappear following anticipated Bank of Canada rate hikes, Larock says he’s skeptical about the extent of those hikes.
“I expect that variable mortgage rates will save money over their fixed-rate alternatives over the year ahead, and, true to their usual form, are a good bet to do so over the next five years,” he wrote recently.
“It won’t be as easy for variable-rate borrowers this year, because I do expect some rate hikes to ensue, but the gap of about 1.25% over the available five-year fixed rate alternatives provides a large and significant buffer that I don’t think that will close in 2022 as the consensus predicts.”
Latest Interest Rate Forecasts
The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.
Bond markets are currently pricing in six quarter-point rate hikes by the end of this year, or 150-bps worth of tightening.
| Target Rate: Year-end ’22 |
Target Rate: Year-end ’23 |
Target Rate: Year-end ’24 |
5-Year BoC Bond Yield: Year-end ’22 |
5-Year BoC Bond Yield: Year-end ’23 |
|
| BMO | 1.50% (+25 bps) | 2.00% (+25 bps) | NA | 1.95% (+20 bps) | 2.25% (+25 bps) |
| CIBC | 1.25% (+25 bps) | 1.75% | NA | NA | NA |
| NBC | 1.50% | 1.75% | NA | 2.00% (+10 bps) | 2.05% (15 bps) |
| RBC | 1.25% (+25 bps) | 1.75% | NA | 1.85% (+20 bps) | 2.10% (+15 bps) |
| Scotia | 2.00% | 2.50% | NA | 2.50% | 2.60% |
| TD | 1.25% | 1.75% | NA | 2.00% | 2.05% |