Hope you had a good summer and are continuing to enjoy the last few weeks remaining. This summer for sure has been different from the recent past years but I guess that is the theme of this decade (at least thus far)!
Amidst the soaring costs of summer, from travel to groceries and gas, we find ourselves yearning for clarity in the unpredictable currents of the financial world. While some expenses are seasonal and may recede with the waning of summer's demand, our curiosity lingers on the elusive long-term trend of interest rates. These rates don't just sway the housing market and our shelter costs; they ripple across lines of credit, student loans, personal finances, vehicle loans, and credit card balances. Moreover, they cast a shadow over investment decisions, influencing bonds, GICs, dividend stocks, growth stocks, and the delicate balance between equity and fixed income assets. With this in mind, it's imperative to delve into the latest interest rate pronouncement from the Bank of Canada.
As of 10 a.m. this morning, September 6th, 2023, the Bank of Canada has made its verdict clear: the Overnight Rate (aka Policy Rate) remains steadfast at 5.00%, while the Bank/Lender Prime Rate stands at 7.20%. This level of the Policy Rate is a rarity, having been seen only briefly at the turn of the century, as we've relished lower rates for the past 22 years.
You can access the complete press release by Bank of Canada here.
If you have been riding the variable rate mortgage rollercoaster (like myself), there's a momentary pause after 10 increments in the past 18 months. This marks the second hiatus this year, and hopefully the rate hike engine doesn't rev back up on October 25th (next BoC meeting). The pause is attributed to softening economic data, including Q2 GDP and job openings. However, inflation remains an ongoing concern, keeping the Bank of Canada vigilant. Borrowers at mortgage term crossroads are opting for short-term solutions, choosing 1- or 2-year Fixed Rate terms, hoping it will be enough to weather this tightening phase.
Since my last update on July 12th, 2023, in just 7 weeks, we've witnessed another substantial surge in Fixed rates offered by lenders. The most significant spike has been observed in the insurable mortgage space, where borrowers vie for mortgage eligibility. On average, the spread between fixed-rate and variable-rate mortgages has shrunk by 10 to 50 basis points, depending on the type and lender. Fixed rates persistently remain lower than variable rates, a peculiar inversion that has endured for 42 weeks. In a typical rate cycle, such an inversion lasts only a few months, yet here we are, in the 9th month of this remarkable anomaly.
Keeping reading for more insight into the mortgage world!
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 3.984% (almost unchanged from 3.994% when last reported). Since my last update, the yields saw a trend-high of 4.195% on 21st August (beating the earlier high of 4.065 on 9th July) on account of higher inflation reported for July 2023. This increase has been passed on by the lenders and is reflected in the higher Fixed Rate mortgage interest rates quoted by the lenders these days.
Checkout the charts below to get an insight into the various trends playing out for mortgages with a 5-year term (Fixed and Variable).
The chart above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 23 months or so. For the shorter term (1-3 year) mortgages, the rates continue to be at a premium to corresponding 5-year rates. The gap between the 3 year and 2-year rates have reduced making 2-year term more attractive to those who qualify at those levels and are hopeful of interest rates reducing sooner.
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. al" times this period is limited to couple of months at best. This inversion is into the 9th month currently and the chart might be implying that we have seen the trough.
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.
So, while all of this is taking place in the macro-environment, how are you adjusting your finances for the long term??
Navigating Mortgage Renewal: A Roadmap to Financial Prudence
As homeowners, we've all reached that familiar financial crossroads when our mortgages come up for renewal. But in today's ever-evolving world of fluctuating interest rates and economic uncertainties, this routine checkpoint has taken on newfound significance. The year 2022 marked a shift, with interest rates on the rise after historic lows, putting you at the brink of a crucial decision that can impact your financial future.
Gone are the days of complacency, defaulting to the easiest renewal option. Whether you're currently in a fixed-rate or variable-rate mortgage, or if new monthly payments are looming large, it's time to take charge of your finances. Our recommendations, tailored to your unique situation, can guide you towards sound choices.
Don't miss this opportunity to secure your financial well-being. Join us as we explore the strategies and insights that empower you to make the best decisions for your mortgage's maturity. Cheers to a clever approach to your money – your future self will thank you!
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!