Fixed mortgage rates are going up. Already, TD Canada Trust has announced they are hiking rates by 0.25%. Their new ‘best advertised rate’ is 4.39%. They are also increasing their 5 year posted rate by 0.25% to 5.44%. This posted rate is important if you are buying with less 20% down. All Banks must qualify borrowers with the posted 5 year fixed rate, or the prescribed rate.
The bond market has climbed steadily over the past few weeks… 5 year Canadian Bond yield is at 2.74% today. That’s an 8 month high. The last time the bond was this high, the best 5 year fixed rate was 4.29%.
If you’re thinking of buying or refinancing, contact your mortgage broker and get a rate held. Most Lenders offer a 120 day rate hold…. You can still get a 5 year fixed rate mortgage for under 4.00%.
On the bright side, these rate increases are a direct result of positive economic data that’s been coming out of Canada. So although we don’t want to pay higher rates, we don’t want to have a weak economy either.
Some of Canada’s major banks have raised their 5 year fixed mortgage rates… but not their posted rates. It’s become common practice for the Big Six Retail banks to show a posted 5 year fixed rate ….but in the past few years the Banks have also started to advertise their so-called ‘special’ rate.
The ‘special’ rate has increased by 0.25% to 4.19% to 4.29%, depending on which Bank you visit. Of course, these rates are still much higher than the true discounted rates available through Mortgage Brokers. Wholesale 5 year fixed rates are still around 3.69% to 3.79% (these will probably go up in a few days by 0.25%). But this is nothing new.
What’s different this time is that the Posted Rates didn’t go up. We’re not sure why, but here is one definite result of this move…your mortgage prepayment penalty will not decrease, which is the usual effect of an interest rate hike. That’s right, if you have a closed fixed rate mortgage to payout, your penalty is either 3 months interest or Interest Rate Differential (IRD).
IRD is calculated many different ways now and we are hoping the Federal Govt’s announcement of a standardized prepayment penalty will come soon (we hear it could come this spring). Currently, Banks use formulas that include the Posted rate to calculate your penalty. This calculation has become a lucrative source of revenue for the Banks. Reports of 6, 10 and even 14 months worth of interest have been charged to unsuspecting borrowers. Record low rates means record HIGH penalties. Come on Federal Govt, we need this change now.
As an aside, Variable rates are still around 2.25%…. this larger gap between fixed and variable is going to make Variable more attractive.
Some things never change…..On Oct 19th, 2010, the 5 year Canadian Bond yield was 1.85%… It fluctuated up and down but staying below 2.00% until Nov 5th when it closed at 2.053%… We were expecting the Banks to adjust their Fixed rates downward but it didn’t happen..
Since then, it has kept above 2.00% and is currently at 2.27%…. This increase in the Bond yield usually means Fixed Mortgage Rates will go up.. See the chart here.
But earlier this week, the Big Six Banks lowered their posted 5 year mortgage rate to 5.19% from 5.29%… This is just a delayed reaction the low bond yields.. but it just goes to show that the Banks continue their pattern of reacting slowing to lowering rates but move like Formula 1 race car to raise rates..
Of course, Posted Mortgage Rates really don’t mean much as the Wholesale Market or Broker Market deals with the true rates.. And Fixed rates dropped late last week to their lowest levels ever. … 5 year fixed rates are now at around 3.49%… with some Lenders even offering 3.39%… WOW!
Watch for Fixed rates to move upward slightly as the Bond yield is now high enough to warrant an increase…
The Canadian dollar is just about at par with the U.S. dollar… The BMO Economist sums it up well when he says “Generally speaking, from a stronger currency, consumers win and producers lose.” As quoted in the Vancouver Sun.
And a high Canadian dollar means the Bank of Canada is less likely to increase the Target Rate which affects Variable Rates… Any move by the Bank of Canada upwards will only drive the Canadian dollar higher…
A high Canadian dollar hurts our exports as they become more expensive for other countries to buy… and we will probably see more cross border shopping as our strong $CAD will have more buying power…
Bottom line is that Variable Rates appear to be safe for now… enjoy the low rates…
Here’s a recent article forecasting low rates that appeared in The Globe and Mail. The article points to Scotiabank’s Economist as saying “the economy has lost considerable momentum.”
Scotiabank is also forecasting the Bank of Canada to keep the Target Rate or the Overnight Rate flat until the 3rd quarter of 2011. This means the Variable rate should remain a good option with rates between 2.25% to 2.30%.
Current Bond yields are at 1.94% as of today…. this means the fixed rate spread is 1.65%.. this is above the normal 1.25% to 1.40%…
Fixed rates are priced closely to the Bond market but indirectly by the Bank of Canada’s actions… we are seeing 5 year fixed rates (the benchmark for fixed rates) hovering at 3.59% to 3.69%… and they could still go lower…
Enjoy the low rates… borrow wisely!