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Fixed Rate Direction After the Cut

Now that prime rate has dropped to 2.50%, variable rates are falling accordingly.  The typical closed variable (for new mortgages) is now just 3.30%, down from 3.80% Monday.

But what about fixed rates?

Interestingly enough, a lot of people were waiting for yesterday’s Bank of Canada rate meeting before deciding on a fixed-rate mortgage.

That’s odd because, unlike variable rates, the Bank of Canada does not directly impact fixed rates.  Fixed rates are instead linked to bond yields (usually)—and bonds, in turn, trade off of economic reports and the relative yields of other securities.

Bond yields are basically unchanged following the Bank of Canada’s rate cut. The 5-year bond is hovering at 1.90% as of this writing. (5-year bond yield chart)

Bond-trading-deskFrom the looks of it, bond traders anticipated just about all of the grim news in yesterday’s Bank of Canada announcement.

So what now? 

To be realistic, not much has changed.  The Bank of Canada told the market very little that it didn’t already know.

For now, we’re once again in a wait-and-see mode. Fixed-rate spreads have improved ever-so-slightly lately.  However, lenders have not cut long-term fixed rates by any appreciable amount in the last week or so. (1-2 year rates have dropped a fair amount though)

In short, the BoC announcement has been a relative non-event for 3-5-year fixed rates.  Going forward, fixed rates will continue to be driven by the economy and bond yields.

If you’re a fixed-rate mortgage shopper it boils down to this.  If you need a fixed mortgage, don’t procrastinate.  There is no reason to put off getting a rate hold now.  If rates go down, most lenders will give you an adjustment before closing anyway.  If fixed rates ramp up, then you’ll be safe and locked-in.