BoC leaves Prime Rate unchanged at 6.70%

As of 10 a.m. on April 12th, 2023, Bank of Canada announced its decision to keep the Overnight Rate (aka Policy Rate) unchanged at its third meeting for 2023. So, in effect Policy rate remains at 4.5% and as a result Bank / Lender Prime Rate should remain unchanged at 6.70%. You can find the entire press release by Bank of Canada here.

Good news for those of you with a variable rate mortgage/ borrowing is that after 9 increments in the last one year, your monthly payments have stabilized. Your interest rate / costs remain unchanged till Bank of Canada revisits this decision next on 7th June 2023 and hopefully, we continue to witness softening in economic data which in turn will allow BoC to hold its rate unchanged for the next little while.

Since the last update on 7th March 2023, the spread between fixed-rate and variable-rate mortgages has increased as fixed rates have decreased recently. Fixed rates continue to be lower and this inversion (Fixed Rate being lower than Variable rate) has persisted for about 20 weeks now. In a normal rate cycle, such an inversion doesn’t persist for more than a few months, and we are currently into the 5th month of this inversion!

Mortgage Interest Rates

As you know the 5-year Fixed-rate mortgages in Canada follow the 5-year bond yields and right now those bond yields are at 3.032% (much lower than 3.612% witnessed on 7th March 2023). Since my last update, the yields saw a high of 3.143% on 29th March but have been range bound between 2.78% to 3.15% This change in direction has had an impact on Fixed Rate mortgages and corresponding Insured and Insurable mortgages have witnessed an decrease of about 0.50% since the last update. If you are unsure about the terms like Insured, Insurable, Uninsured or Rental, check out the explanation at the bottom1.

Checkout the charts below to get an insight into the various trends playing out for mortgages with a 5-year term (Fixed and Variable).

Trend - 5-year Mortgage Rate

The chart above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 20 months or so. For the shorter term (1-3 year) mortgages, the rates continue to be at a a premium to corresponding 5-year rates.

Spread between Fixed and Variable Rate mortgages

Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but currently we are in a phase where the relationship is inverse. This typically happens when the interest rate trend is under reversal. There is no guideline as to how long such an inverse relationship can persist but in "normal" times this period is limited to couple of months at best. This inversion has persisted for over 4 months now!

Trend of Discount to Prime - Variable Rate Mortgage

When somebody secures a Variable Rate mortgage, the only aspect that is held constant is the discount to Prime Rate (and fixed payments in some instances) that they enjoy. However, the actual interest rate and interest costs change as Prime Rate changes. The above chart depicts the trend with pricing or discount that lenders are offering on such variable rate products. A higher discount generally depicts a higher demand for variable rate mortgage and how the competition between lenders is responding to corresponding demand and vice-versa.

Note: If you're struggling to figure out your financing options, interested in working with me or want to learn more about my services, please don't hesitate to get in touch. I'd be happy to chat!