Fixed mortgage rates have joined their next of kin variable mortgage rates in decreasing since the Bank of Canada lowered its overnight rate on June 5. Variable rates move in tandem with the bank’s rate, while fixed rates are influenced by bond yields. When those decline, fixed mortgage rates decline, with the reverse also being true. “Last week, Government of Canada bond yields slipped 36 basis points (36%) before partially recovering, with mortgage providers responding by lowering their fixed mortgage rates by as much as 25 basis points, or 0.25%, with reductions coming across all terms, but predominantly three-year and five-year terms, reports Canadian Mortgage Trends (CMT). Ryan Sims, mortgage broker and rate analyst, told CMT the rate drops are due to last week’s bank rate drop, plus the rise in bank mortgage default rates and weakening economic data, including slower-than-expected GDP growth and easing of inflation. “Also, let’s keep in mind that five-year fixed rates — even after this recent slide — are still about 20 basis points higher than where we were back in January,” Sims said. “But if we continue to see inflation slip lower, that should be supportive of higher bond prices and lower yields,” he added. “Of course, if we start to see inflation pick back up, then expect the opposite.” Canada’s big banks have been slow to lower their fixed rates, with all of their rates remaining mostly untouched over the past month, aside from some discretionary pricing. Ron Butler of Butler Mortgage told CMT in the past interest rates typically “take the elevator on the way up and the stairs on the way down.” Sims speculates the chartered banks are hoping to take some profit as they see their loan losses mount, reports CMT. “Over the last six months, the Big 5 have written off over $3 billion of bad debt, and no, I don’t mean loan loss provisions,” he said. “Being a little slow to drop rates will give them a little padding to make it back up, albeit slowly.” Sims added the banks may want to see if last week’s rate changes are a knee-jerk reaction to the Bank of Canada’s rate cut or if they’re more sustained. If the rate cuts hold, he suspects rate drops from the big banks will follow in the coming week or so, says CMT. There is no crystal ball looking into how rates will perform, said Sims. “The path for rates will remain unpredictable as always, and certainly not a straight line down,” Sims said. Similarly, Butler tells CMT that rates will trend lower from here, but the journey will be uneven. “Expect a bumpy decline, but eventually lower rates than today,” he said, adding that borrowers shouldn’t expect any mortgage rates below 4% this year. “While five-year fixed mortgage rates are currently among the lowest, borrowers may be wary about locking in for such a long term given the likelihood that rates will continue to decline from here,” reports CMT, asking “which mortgage term currently offers the best value over the term of the mortgage?” “For Butler, the answer is a three-year fixed mortgage, which can be had for as low as 4.84% for a default-insured mortgage and 5.19% for a conventional mortgage, according to data from MortgageLogic.news.” Sims told CMT he tends to favour variable rates over the longer term, but said the spread right now is too great at roughly 115 basis points, and thinks a fixed term makes more sense. “For the variable to make sense, you would need to see another five cuts (in addition to the June rate cut) to break even,” he said. “Will we get five cuts? Probably, however the timing may take a lot longer than people realize.” “That could result in variable-rate borrowers overpaying at the beginning of their term in the hopes of lower rates down the road,” reports CMT. “But Sims says the other factor to consider is that banks and other lenders don’t pass along the full magnitude of the rate cuts, particularly if mortgage losses start to mount.” “If someone is comfortable with the payment, then the fixed mortgage will win out,” he added. “Less stress, less hassle, and a lot of predictability. And in today’s environment, predictability is worth something.”
