Fall season has worked its enchantment, painting the world in warm, rich hues and gracing us with that exhilarating chill in the air (at least, until last week!). We might soon find ourselves wrapped in cozy sweaters and savoring pumpkin-spiced everything once more, and I hope you're enjoying this season as much as I am.
Coming to the task on hand... As of 10 a.m. on this fine October 25th, 2023, the Bank of Canada has made its latest announcement: the Overnight Rate, also known as the Policy Rate, remains firm at 5.00%, and the Bank/Lender Prime Rate stands at 7.20%. This policy rate is at a rarity, having touched this level only briefly at the turn of the century.
You can access the complete press release by Bank of Canada here.
If you've been riding the variable rate mortgage rollercoaster (like myself), there's a momentary pause after 10 rate increments in the last 20 months. This marks the second break this year, and we hope we're at the end of the current rate hike cycle. However, inflation continues to be a concern, prompting the Bank of Canada to maintain a firm stance. Borrowers at mortgage crossroads are leaning towards medium-term solutions, such as 3-year Fixed Rate terms or maybe sticking with a Variable Rate mortgage, in hopes of weathering this tightening phase and potentially a 'higher for longer' scenario.
Since my last update on September 6th, 2023, we've witnessed another surge in Fixed rates offered by lenders. The most significant increase has been observed in the insured mortgage space, where borrowers compete for mortgage eligibility. On average, the gap between fixed-rate and variable-rate mortgages has shrunk by 10 to 70 basis points, depending on the type and lender. The difference between Fixed and Variable rates is most narrow for insurable mortgages. Fixed rates continue to persistently remain lower than variable rates, a peculiar inversion that has now endured for 47 weeks. In a typical rate cycle, such an inversion lasts only a few months, yet here we are, in the 11th month of this remarkable anomaly.
Keep reading for more insights 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 4.267% (much higher than 3.984%, when last reported). Since my last update, the yields saw a trend-high of 4.461% on 2nd October (beating the earlier high of 4.195% on 1st August). This increase has been passed on by the lenders and is reflected in the higher Fixed Rate mortgage interest rates quoted by the lenders.
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 rate2 for the major types of mortgage products (Fixed and Variable) for the last 25 months or so. For the shorter term (1-3 year) 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 is into the 11th 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.
In light of these broader economic developments, how are you adapting your long-term financial strategy?
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!