Prime Rate at 7.20%: Staying put?

Welcome to my second update of the year.

As we bid farewell to a surprisingly warm winter, we eagerly welcome the promise of spring in the air! With March break on the horizon, may this season of renewal bring you joy, relaxation, and cherished moments with loved ones. Happy reading!

Coming to the immediate task at hand, as of 10 a.m. on this exceptionally warm morning of 6th March 2024, the Bank of Canada has announced its 2nd policy rate announcement for the year – and it’s a steady 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%.

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

Since my last update on January 24th, 2024, we witnessed a lower-than-expected inflation reading for Jan 2024, which somewhat alleviated concerns raised by the December figures. Further, there have been recent reports of uptick in mortgage delinquencies in Ontario and BC.  However, Canada also avoided a technical recession, as GDP figures for Q4 2023 showed slight growth. Although not as dramatic as in the US, this shift in GDP figures has tempered predictions for interest rate cuts, from a speculated 1.50% to around 0.75%. The timeline for the first interest rate cut has also been extended to the June or possibly July meeting.

This has serious implications for those faced with any mortgage decision to make and I would recommend that you read my conclusions at the bottom of this email.  But let’s review some market updates before you rush over there.

Mortgage Interest Rates

Let’s delve into what’s happening with Fixed Rate mortgages. As you are aware, these rates closely follow the trajectory of bond yields, and movements in bond yields can greatly influence them.

Presently, the 5-year bond yield stands at 3.41%, a marginal reduction from 3.58% reported in our last communication on January 24th, 2024. However, they briefly spiked to 3.832% on February 12th, 2024, following higher than expected US CPI figures for January 2024. This increase was short-lived and began decreasing the very next day. Almost all lenders have dropped their 5-year fixed rates for insured mortgages to under 5%.

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

Note: The rates indicated below are the most commonly available rates for Prime borrowers. Many Qualified borrowers secure a lower interest rate than depicted below due to superior credentials. Interest rates with B-lenders and Private mortgages are at a premium to these levels.

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 15 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 29 months or so but looks like they have hit the peak. 

Trend of Discount to Prime - Variable Rate Mortgage

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.

Below are the key conclusions I can draw from these charts:

1. The spread between Bond Yields and Fixed Rates remains higher than usual, indicating that lenders still have room to lower rates even if bond yields do not decrease.

2. The significant disparity between Fixed and Variable rates is solely attributable to the policy decisions of the Bank of Canada. This results in a substantially higher cost (higher by 1.30% or more) for those opting to remain with Variable Rates.

3. Variable Rate mortgages are currently being offered at a “Discount” to Prime Rate, which is ‘lower’ than the long-term average. This suggests that they are not priced efficiently.

4. Borrowers considering a “New” Variable Rate mortgage are ‘assuming’ that the Bank of Canada’s Policy Rate (and consequently Prime Rate) will decrease by at least 1.75% to 2.25% within next 12 months to justify doing so.

5. Borrowers with an “Existing” Variable Rate mortgages are ‘assuming’ that the Bank of Canada’s Policy Rate (and consequently Prime Rate) will decrease by at least 1.00% to 1.50% or more within next 12 months to avoid overpaying.
   

For more insights, I would encourage you to read my latest blogs “Time sensitive: Should you Stick with a Variable Rate or Switch to Fixed?” and “Navigating Your Mortgage Renewal: Best Practices for Homeowners”

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!