Shopping for a mortgage? Variable rates are a bet that should not be taken


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If you’re in the trenches buying a new mortgage, I’m going to tell you something that I’ve rarely told anyone in 13 years in this business: Variable rates are a bet you don’t need to take.

There is no doubt in my mind that you will earn at least a year or two by floating your mortgage rate. But the third year is crap. And years four and five carry a legitimate risk of higher borrowing costs.

The why’

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Well, on the one hand, the Bank of Canada is flooding our financial market with liquidity. And he is promised to continue to do so until next year by purchasing a range of debt securities, which temporarily suppress mortgage rates and encourage people to borrow.

On top of that, you have the Department of Finance distributing billions of dollars to workers affected by COVID-19.

Many fear that all of this spending will catch up with us when the economy recovers with higher inflation. And even if a spike in inflation only lasts a year or two, that may be all that’s needed to help five-year fixed rates outperform.

With the lowest fixed rates now less than seven basis points above the cheapest variable rates, a single rate hike by the Bank of Canada over the next 42 months would make a variable rate more expensive based on the factors alone. interest charges. (There are 100 basis points in a percentage point.)

What is the likelihood of seeing a central bank hike in this time frame?

“The short answer is that it is very likely that the Bank of Canada will hike rates at least once over the next 3.5 years,” said Benjamin Tal, deputy chief economist at the Canadian Imperial Bank of Commerce, during an interview. “We have to remember that we are at emergency rates and a reasonable scenario is that the emergency will not last 3.5 years given the nature [of it]. “

Unprecedented stimulus measures and record public debt issuances are simply not compatible with zero percent interest rates in the long run. When our government stops buying bonds, unemployment drops, and consumer demand dips above pre-crisis levels, the rate cap disappears.

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And when it does, it happens quickly. Yields can rise 75 basis points or more overnight – well, in 30 to 60 days – once traders believe inflation has risen back above the central bank’s 2% target .

When this happens, you will want to be in a fixed rate.

Timing is always a factor

For Joe Homeowner, stable or declining yields are good news from a borrowing cost perspective.

With central bank buying and uncertain short-term growth prospects, bond yields could easily fall further, dragging fixed mortgage rates with them. The problem is, no one knows for sure if, when or how far they will fall.

For those trying to figure out when to lock in, the best we can say right now is that fixed rates will stay near or below current levels until the five-year bond yield rises above 0.6% and y rest. It’s at 0.33 percent as of this writing.

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Until then, it’s a waiting game. And with today’s record five-year fixed rates below 1.99%, you have to ask yourself: how long are you willing to roll the dice and wait to save one more? two or three tenths of a percentage point?

The sensible options

If you’re applying for a new mortgage now, have long-term financing needs and medium to low tolerance for risk, a five-year fixed rate of less than 2% has your name everywhere. The risk-reward ratio is easily “good enough”.

Of course, as central banks pledge to keep rates close to zero for another one to two years, it’s tempting to try your luck on a one-year fixed rate. They are priced from 1.59 percent to 1.99 percent depending on the equity in your home.

For financially sound borrowers, a short-term fixed rate is an understandable game – especially with economists like Mr. Tal expecting minimal short-term rate risk. “I don’t see the Bank of Canada moving before 2022,” he projects.

But for a typical borrower who plans to hold a mortgage for a full five years, the best value today is a five-year fixed loan – from a fair penalty lender in case you break it early – to 1.99% or less. .

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Robert McLister is one of the founders of and intelliMortgage, and mortgage publisher at You can follow him on Twitter at @RateSpy.


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