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  • Writer's pictureNeil Joseph

Prime Rate at 7.20%: Remains high

Updated: Feb 12


Bank of Canada Update
Bank of Canada Update

Wishing you and your family a Happy New Year!

 

Welcome to my first update of the year. As winter blankets us in snow, let's warm up with positive thoughts, resolutions, and financial goals. This year is expected to be a pivotal year for inflation and interest rates and so stay informed to make better decisions regarding your mortgage, real estate investments and borrowings in general.


Coming to the immediate task at hand, as of 10 a.m. on this cold January morning of 25th January 2024, the Bank of Canada has unveiled its first policy rate announcement for the year – and thankfully it's a HOLD! The Overnight Rate, also known as the Policy Rate, remains steadfast at a multi-decade high of 5.00%, consequently leaving the Bank/Lender Prime Rate standing at 7.20%.  This can be construed as a relief given the slight jump in inflation we witnessed for Dec 2023.


Since my last update on December 6th, 2023, we've witnessed a notable dip in the bond yields and many lenders also followed through by dropping rate for Fixed Rate Mortgages. However, much of the drop in yield got reversed after the more than expected jump in inflation on both sides of the border.  At the end of 2023, bond markets were anticipating a drop of 1.5% in policy rates but those expectations have moderated to about 1.25%.  The timeline for the 1st interest rate cut has also been pushed out to the June meeting.


In the ever-evolving landscape of the mortgage world, these trends continue to shape the financial decisions of many. Whether you're a first-time homebuyer or a seasoned property owner, these insights offer a glimpse into the dynamics influencing the market.


You can access the complete press release by the Bank of Canada [here].


Keep reading for more insights into the mortgage world!


Mortgage Interest Rates

Continuing our exploration of the financial landscape, let's delve into the intriguing world of 5-year Fixed-rate mortgages in Canada. As you are aware, these rates closely follow the trajectory of bond yields, and the movements in bond yield can portend possibly changes in Fixed Rate.


Presently, the 5-year bond yields stand at 3.58%, a slight increase from 3.47% reported in our last communication on December 6th, 2023. However, they did go down to a low of 3.114% on 20th Dec 2023 after commentary from US Fed which appeared to suggest the interest rate cuts are on the horizon.  This decrease however got reversed earlier this month after the higher-than-expected inflation for December on both sides of the border.  Some of the lenders are dropped their 5-year fixed rates for insured mortgages below 5% but that lasted only for a couple of days.


For those who may be unfamiliar with terms like Insured, Insurable, Uninsured, or Rental, a concise explanation is provided at the bottom1 for your reference.


To offer you a visual insight into the evolving trends, we've included charts below. These charts illuminate the various dynamics influencing mortgages with a 5-year term, be it Fixed or Variable.




The charts above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 29 months or so.  For the shorter term (1-3 year) Fixed rate mortgages, the rates continue to be at a premium to corresponding 5-year rates. 



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 about 14 months now and the chart might be implying that we have seen the trough.



Above chart (newly added) shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate).  This spread has been widening for the last 26 months or so but looks like they have hit the peak. 



When one secures a Variable Rate mortgage, the only constant is the discount to the Prime Rate, with fixed payments in some instances. The actual interest rate and associated costs, however, are subject to change as the Prime Rate fluctuates. The chart above paints a vivid picture of the pricing trends or discounts that lenders are offering on Variable Rate products.


A higher discount on the chart generally signifies a heightened demand for Variable Rate mortgages. It reflects the dynamic interplay between borrower preferences and the response of lenders to this demand. Conversely, a lower discount may indicate a market shift towards Fixed Rate products.


In a market where precision is paramount, staying informed about these fluctuations empowers you to make well-informed decisions. Whether you are contemplating a new mortgage, exploring refinancing options, or simply keeping a keen eye on the market, these insights aim to guide you through the complexities.


Feel free to reach out if you have any queries or require further clarification on the trends outlined above.


Note: If you need help with your financing options, are 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!

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