Have Fixed mortgage rates hit the bottom?

record low ratesEarlier this year, Fixed rates hit new all-time lows.  This must sounds like a broken record, or for those in the modern error, sounds like a glitch or a skip (somehow, ‘broken record’ sounds better).

5 year fixed rates hit 2.59%.  This is the lowest we have ever seen. (before you start emailing me that you’ve seen lower rates, yes, I know.. I see them too and have access to them.. but those products are full of restrictions, limitations and inflated prepayment penalty calculations… for our purposes, I’m only discussing quality mortgage products with no gimmicks or strings attached).

Now, looking at the 5 yr govt of Cda bond yields (this is where fixed rates are closely priced from), we have seen this drop down to as low as 0.70%… it’s been holding steady in the 0.80% range since July.    Normally, the 5 fixed rate is priced 1.10% to 1.50% above the 5 yr bond yield..  but the spread has been at or over 1.79% for quite a while.   So, why haven’t the fixed rates gone down further?

Banks and Lenders are making a higher profit.  They’ve also had a great year.  Home sales are active.  Mortgage financing is active.  The fiscal year-end for most Banks and financial institutions is Oct 31st.   They’ve met their targets long ago and don’t need to keep the taps turned on.  Less is more, as they.  Less business but more profit.

As we look deeper, the new Federal Liberal govt under Justin Trudeau means more govt spending and debt.   This means a higher cost of funds for you and I.   We can expect slightly higher 5 yr govt of cda bond yields… that means higher fixed mortgage rates.

So, yes, I think we have hit the bottom for fixed mortgage rates..   But that doesn’t directly affect the Variable rate.   Today’s best Variable rate product is Prime less 0.65%, that’s 2.70% – 0.65% = 2.05%.   Variable rates are priced from the Bank of Canada rate.   And it’s true, the BOC rate is influenced by the govt of cda bond yields, but the main driver is inflation.  If inflation goes above the BOC target rate, then we will see Bank Prime increase.

By the way, no matter how you slice, these are ridiculously low interest rates.  Under 3.00% is something we have never seen in modern history

Historically, fixed rates increase before Variable rates.  And if you really want to predict future trends, study the 2 yr govt of cda bond yield.  This is a good 6 month indicator of where rates are heading.  You’ll see they’ve gone up around 0.15% over the past 2 months.

For now, the BOC is holding steady as they wait… and watch to see just how much Mr. Trudeau will actually spend.    Hey, Mr. Trudeau, it’s okay if you don’t follow through on your promise to spend and increase our National debt level.  I, for one, would rather not see more govt…  Less is more….

Your best interest is my only interest.   I reply to all questions and I welcome your comments.  Like this article?  Share with a friend.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

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