Welcome to the 7th edition of our Mortgage Newsletter for 2024!
At 9:45 am this morning, Bank of Canada (BoC) announced the latest rate cut decision, decreasing its Policy Rate by 0.50% (from 4.25% to 3.75%). This is the fourth consecutive rate drop in four meetings, bringing the Prime Rate to 5.95%. For those with variable rate mortgages or loans, this means another round of reduction in monthly interest costs. Since June 2024, your interest costs have dropped by about $103.90 cumulatively for every $100,000 of debt.
Below are the recent economic updates that likely aided this move:
In Canada: The Consumer Price Index (CPI) continues its downward slide, with both August and September coming in below the Bank of Canada's 2% target—finally giving our wallets some much-needed breathing room! Meanwhile, GDP growth is playing hard to get, with no growth expected for August and a measly 0.2% in July. Despite the stagnant economy, the job market seems to have missed the memo, adding jobs in both August and September (how we're adding jobs without GDP growth is anyone's guess!). Unemployment ticked up slightly in September to 6.5%, after dropping to 6.6% in August. Guess even the labor market is confused these days!
In the US: Unemployment is inching upward too, after hitting a high of 4.3% in July, followed by 4.2% in August and 4.1% in September. On the brighter side, inflation continues to cool, with the CPI dropping to 2.4% in September. But don’t count them out just yet—GDP growth remains strong, with 3% annualized growth in Q2 and an even stronger preliminary estimate of 3.2% for Q3. America’s economy is still flexing, even while we're trying to figure out what's happening up north.
Given the overall slowdown in Canadian economic activity, cooling inflation, and rising unemployment, there’s a small chorus calling for another 0.50% rate cut at the BoC's last meeting of the year on December 11th. Looks like the holiday gift this year might be another Prime Rate drop—fingers crossed!
Mortgage Market Insights
Bond Yield and Fixed Rate Spread: The gap between bond yields and fixed mortgage rates has finally settled back into its long-term groove, at least for insured and insurable mortgages. As more people jump back into the housing market, we can expect uninsured mortgages to follow suit. It’s like the spread is taking its time—fashionably late, but expected to show up soon!
Fixed vs. Variable Rates: Fixed rates are still the cheaper date compared to variable-rate mortgages, but the gap is narrowing faster than you can say "rate cut!" Thanks to today’s move, the difference now hovers between 0.60% and 0.90%. If this trend continues, we might be looking at a photo finish by early 2025—just in time for the New Year’s resolutions (perhaps one about better rates?).
Variable Rate Discount: Variable rates are still technically offered at a "discount" to the Prime Rate, but let’s be honest—it’s more of a small discount, like finding a 5% off coupon when you were hoping for 25%. But don’t worry! As demand for these products rises, we can expect those discounts to get a little more generous over the next 12 to 18 months. Fingers crossed for the sales event of the century!
Betting on the Rate?: If you’re choosing a variable-rate mortgage right now, or sticking with one you already have, you’re basically placing a bet that the Prime Rate will drop by at least 0.75% to 1.00% in the next 15 months. It’s like waiting for your favourite team to make a comeback—you're hoping for that winning streak to help you break even compared to today’s 3-year fixed-rate mortgage.
What Should You Do?
1. Evaluate the 5-Year Variable Rate Mortgage: If your budget can handle a little unpredictability, a variable-rate mortgage could save you money over the next five years—or maybe even just three. But no pressure. Keep an eye on the spread between 3-year fixed terms, though, because fixed-rate pricing seems to be taking a breather from its downward spiral. It’s a bit of a gamble—do you lock in guaranteed lower costs now, or hold out for potential savings? Decisions, decisions.
2. Plan for Your Mortgage Renewal: If your renewal is coming up, choosing a variable-rate mortgage might be the smarter move compared to locking in a fixed rate at this moment. But hey, why not wait until March/April 2025 to decide? If rates go up, you can always convert to a fixed rate—because nothing says excitement like playing the waiting game with your mortgage.
3. Fixed Rate Mortgage Considerations: If you’re leaning toward a fixed-rate mortgage, read the fine print like it’s the terms of service for your phone contract. A sudden drop in rates (yes, the odds are slim, but hey, anything can happen!) could make breaking your mortgage ridiculously expensive thanks to those lovely penalties. So, ask yourself: do you really want to be in a long-term relationship with your mortgage right now? Maybe waiting until March or April 2025 is the safer bet.
4. Assess Your Current Fixed Rate Mortgage: If you’re locked into a fixed-rate mortgage with more than 2.5 years left on your term and your rate is above 5%, now is the time to consider your options. Waiting too long to switch could mean you’re stuck paying extra, and we all know how much fun that is.
No matter your situation, I recommend consulting with a professional at this stage—don’t go playing mortgage roulette without some expert advice to guide you!
For detailed insights, keep reading...
Mortgage Interest Rates
Presently, the 5-year bond yield stands at 3.022%, slightly higher than the 2.934% we reported last time on September 4, 2024. Yields took a dip to 2.717% on September 16 before climbing back above the 3% mark in early October. They’ve certainly come down quite a bit from the peak of 4.461% (briefly touched on October 2, 2023), and we’re now just about 30 basis points away from the lowest levels we’ve seen in the last 18 months.
For those who love numbers as much as I do, we’ve included some charts below. These visual aids will help you see the trends in 5-year mortgages, whether fixed or variable. Consider it your “mortgage trend crystal ball”—minus the smoke and mysticism!
For those unfamiliar with terms like Insured, Insurable, Uninsured, or Rental, a concise explanation is provided in note# 1 below.
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 show the trend in interest rate (see note#2) for Fixed Rate Mortgage types for the last 36 months or so. The rates have fallen by about 1.50% to 1.60% from their peak in October 2023. For the shorter term (1-3 year) Fixed rate mortgages, the premium over corresponding 5-year rates have continued to reduce (almost eliminated in the case of 3 year term).
Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate). This spread continues to narrow but is still higher than the usual 0.75% to 1.50% range depending on the kind of mortgage.
The charts above show the trend in interest rate (see note#2) for Variable Rate mortgage types for the last 36 months or so. Do note the Variable Rate Pricing will adjust later today or tomorrow to reflect the change in Prime Rate. The speed of adjustment in Variable Rate is much slower than the Fixed Rates given the dependency with Bank of Canada’s decision schedule.
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.
We are most likely getting into a phase where more borrowers will opt for a Variable Rate mortgage given potential for reduction in Prime Rate and so the Discount to Prime Rate should be increasing in coming months.
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 23 months now but should revert back to normal in another 3 to 4 months.
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! Schedule meeting per your convenience here.
1. Explanation of key terms
Insured – These mortgages are backed by a mortgage insurer like CMHC and borrower needs to pay an insurance premium. All properties purchased with less than 20% downpayment fall under this category and come with an amortization of 25 years or lower and purchase price cannot be higher than $1M.
Insurable – These mortgages require the borrower to have a downpayment of 20% or higher, amortization is restricted to 25 years or lower and purchase price cannot be higher than $1M.
Uninsured – These mortgages require the borrower to have a downpayment of 20% of higher but amortization can be 30 year or lower and purchase price can be higher than $1M.
Rental – These mortgages are specifically for Rental or Investment properties and need to have a downpayment of 20% or higher but come with amortization of 30 years (with most lenders) and purchase price can be higher than $1M.
2. Interest Rates depicted are those which are commonly accessible by most well-qualified borrowers with excellent credit and debt service ratios. Some borrowers might be able to secure an interest rate which is lower than these levels on account of superior qualification. Interest rates with B-lenders and Private mortgages are much higher than these levels.
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