Many clients ask whether they should go with a fixed or variable rate and most times there is a clear winner; with the news today from the bank of Canada that they are holding the overnight rate at 1.75% (and Bank prime rate at 3.95%) and the negatives outweighing the positives many are now expecting fewer rate increases in 2019. Thus the advantage fixed rates have had over the past 12 months has disappeared.
As widely expected, the Bank of Canada kept the benchmark rate at 1.75% today, but more importantly, the positive spin from the October announcement was gone. The Bank of Canada’s concluding comment stated that the pace of interest-rate increases will be determined by a number of factors, including the effect of higher borrowing costs on household spending, the trade wars, the persistence of the oil-price shock, and the central bank’s assessment of the economy’s capacity. In saying this the Bank of Canada has made it clear that they will no longer be quickly moving towards a rate of 2.5-3.5% which the major banks agree, and have cut their expectation from 3 or 4 increases to between 2 and 3, with none in Q1 of 2019. The major banks have remained steady with their variable rates at prime – 0.7%, and monolines are still offering rates as low as prime – 1.24% on insured and insurable mortgages. Many consumers are taking the variable option with such deep discounts. We still see the discount offered on variable mortgages to remain flat over the next few months.
Over the last 30 days most lenders raised rates once and given the outlook from the Bank of Canada meeting today, we expect this to quickly be reversed. Bond yields since the November 8th have fallen 35bp and are flat since February 2018, given the drop in bond yields it is widely expected that fixed rates are headed lower in the short term. Over the next 12 months, we would not be surprised to see fixed rates 0.25-0.50% higher. There are still lenders offering as low as 3.39% for a 5 year fixed insured mortgage, but most lenders are currently between 3.54% and 3.99% for insurable and uninsured mortgages.
Shawn Stillman, CPA, CA
Mortgage Outlet Inc. #12628