Waiting for Better Fixed Rates

BoC-and-fixed-rates The Bank of Canada’s next interest rate announcement is just two weeks away, and many mortgage shoppers are fixated on it.

We’ve probably spoken to a dozen people in the last week who want a fixed-rate mortgage but don’t want to apply until the Bank of Canada meets March 3.  The thinking is that the BoC announcement will cause fixed rates to fall.

We’re used to seeing this psychology with variable-rate shoppers but not with fixed rates.  As such, it’s worth examining further the linkage between the Bank of Canada and fixed mortgage rates.

As many know, the BoC sets Canada’s overnight target rate.  This in turn influences prime rate, which directly affects variable rates.

Fixed rates are a different story.  Fixed rates are driven by bond yields (usually, that is—the last few quarters have been atypical).  The Bank of Canada has no direct control over bond yields, although it can influence them in certain ways.

The fact that bonds are independent from the Bank of Canada is something many don’t grasp.  For example, the entire country might expect the Bank of Canada to cut rates 1/4% on March 3, but if stronger-than-expected economic reports precede the BoC announcement, bond yields could jump.  In that case, fixed mortgage rates could increase while variable rates fall.  (We’re not saying that will happen this time. It’s just an example.)

So how much do fixed rates really follow the Bank of Canada’s lead?  According to TD, “for every percentage point of central bank easing (for example), the 5-year yield should decline by 70 bps.” 

We ran our own tests and found the correlation between prime rate and 5-year bond yields to be 69.5% over the last 10 years.  So, a fair amount of time, bond yields will deviate from prime rate. 

That makes sense because 5-year yields are driven by demand for long-term funds while prime rate is linked to demand for short-term funds.

The chart below illustrates how the direction of 5-year yields and prime can differ drastically over 3-6 month timeframes.

Bond-Yields-vs-Prime

In sum, bond yields and prime rate (and fixed and variable rates) do move together long-term.  But short term, anything can happen.

So.  Should fixed-rate mortgage shoppers wait until the Bank of Canada’s rate announcement before locking in? 

In our view, no.  It’s just a gamble.

There isn’t much foreseeable to gain by doing this unless one feels strongly that the Bank of Canada will scare the market with a dire economic forecast…and drive down bond yields.

Most folks in this boat are simply trying to outguess the market, which no one can do consistently.  Moreover, they’re disregarding the fact that fixed rates are already at historic lows. 

Why bother with greed-driven chance taking when you can lock in now, get assurance that your rate won’t go up, and have the ability to request a downward rate adjustment should your lender drop rates in the next few weeks?

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Here’s a 2nd opinion from Canadian Business Magazine (old but still good). Link

  1. “and have the ability to request a downward rate adjustment should your lender drop rates in the next few weeks”
    Could you please elaborate on this comment? I’ve never heard of such a thing with a lender?

  2. I’d like an explanation at that too.
    Also maybe you could advise me as i have to close a mortgage soon ( one of those suckers waiting till march 3rd results to lock in :) )
    I have a guaranteed 4.29% fixed for 5 years with some extras (banking fees waved and some miles) offered by one bank (nothing too great)
    Or 4.39% with 600$ towards notary fees with another bank – no extras
    or 4.19 from a mortgage specialist – no extras…
    Could you PLEASE advise me of which option is the best?

  3. If the fixed rate drops between the time the lender committed the rate to you and X number of days before your closing you will get the lowest rate.
    Some lenders do this automatically and some will wait for a request from the broker.

  4. What is a typical spread between 5-year bond rates and actual (discounted) 5-year fixed mortgage rates, going back a few years?

  5. Great explanation. You can tell people this but many still don’t seem to get it. It’s nice to have a 3rd party opinion to link to.

  6. Hey, I’m no expert on mortgages nor the financial sector. Now that we have that out of the way, perhaps the last few quarters have been atypical, but I have seen the fixed rate following the variable rate in terms of most broker lenders including the major banks (i.e. it has been hovering 1.0 to 1.2 percent above variable over the last 2 months for the majority of lenders). With the variable rate as low as it is now (3.80%) the banks must be hard pressed to keep their fixed rates as high as 5.79 percent. That can’t be good for selling fixed rate mortgages. So why not assume that if the variable rate goes even lower than it is, that the minor lenders and major lenders will continue to drop their fixed rate mortgages to at least offer some semblance of fixed rates being competitive with variable rates? In a free market, you don’t sell as much by having the highest price as you do with a reasonable or much lower price. And it’s not like 5 year bond yields have been climbing considerably either… So why wouldn’t the lenders drop their fixed rate mortgages to give themselves a chance of selling people on fixed rates in a depression / recession market?

  7. I was reading one article about 5year bond yield which is hovering around 1.65 – 2.00% for last 2-3 months. As of today, it still hovers around 2.00% as i see on the bank of canada website. The chartered banks as per the article adds up 1.20 – 1.50% on the existing bond yield rate (so that they get some money from borrowers). In that sense, it would come to 3.20% – 3.50%. TD is offering 4.09%(5 years fixed) to me and i am fighting to push them for 4.00% as for them they are getting way more then what their margin is (as above). In fact, i did got an offer from other bank for 3.90 % which i showed to TD and that made them come down to4.09%. I am hoping that i get atleast 4.00% in order for me to lock the rate for 5 years. I did an early renewal and now they are talking about penalising me if i leave them. Let’s see how things go. I will let you know if it works out in my favour

  8. i live in ontario. this is national bank of canada who offered me this rate.
    PS – needless to mention that you need to have a good credit scoring in order for you to bargain

  9. I know National Bank very well and there is zero chance IMO that National would offer 3.90% on a five year.
    Nilesh’s post is pure rate spam.

  10. What it states nilesh, is that ONLY people who have bought or sold through a Sutton agent are eligible. So you have to have paid them money in order to get this deal. IMO, if you pay them money, then its not really a fair comparison to ask another lender (TD or example) who HASN’T make $10k off your home sale/purchase, to match the rate.
    That said, if you happened to use a Sutton agent, then its still a good deal…..

  11. How about going through valueland – they advertise the 5 yr fixed rate of 3.99. If a rate like that is advertised to the public, its not unreasonable to believe someone got 3.90 from national.

  12. This is Suttons page Nilesh. It has nothing to do with National Bank and it entails many restrictions and downsides (which I will not get into).
    National Bank does NOT offer 3.90% on a five year. I maintain: your post is 100% rate spam.

  13. for people in quebec industrial alliance offers very good rates through only few broker channels you can call industrial alliance and ask who offers their products, sutton realtors are buying down rates through different channels, for first time home buyer, not bad.

  14. I was talking to both a broker and the bank — bank came back with same as MortgageNovice, broker said he could do the same, not better. I even asked the broker re: 3.99% being offered as posted here on CMT a little while ago and he basically blew it off, implying it was probably from an aggressive lender with a highly restrictive agreement. Since it was accessible only via a broker, I never did find out who was offering it, and am now working with the bank. Kevin, do you have more info to offer?

  15. Frank – Banks don’t price fixed rates based on what variable rates are doing. There is no “competition” between these two types of mortgages. Each mortgage is priced based on the price of money for that term — and the price of money for variables is very different from fixed rates.

  16. TD staff get 1.5% off of a vanilla fixed rate mortgage. NOT special offers. The staff rate is a joke, as most customeres get the same.
    The problem however is for staff members this discount could be concidered a taxable benefit.. So I advise staff members to go elsewhere and get the 1.5% (or more) they will offer off the rate.

  17. Ex Staff at TD thank god,
    what is wrong with the staff Heloc at Prime less .50.
    Is that too plain vanilla for ya? Maybe you want to go elswhere and pay 125 bps higher?

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