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.

  1. Good advice. I’ve locked with my broker at 4.19 for 5 years with a 120-day hold. If I get within 30 days of closing, with current rates I can relock at a hair under 4%.
    I did an analysis and using the best rates on for 5-year fixed (3.92%) and variable (2.95%). Assume I choose to gamble on a variable and then switch to a 5-year fixed when prime rates go up 0.25% (assume fixed 5-year increases to 4.25%). If this increase happens within 13 months of the start of my mortgage, I’d have been better off just sticking with the 3.92% fixed instead of gambling with the variable. And this is assuming the variable is open at this rate and that fixed 5-years only increase to 4.25% when the central bank starts to hike the prime.
    So who thinks that the central bank will start increasing within a year? Any bets? :)

  2. I doubt the BoC will increase the Key Interest Rate this year and probably most of next. An interest rate hike will have to be supported by clear indicators that prices are increasing rapidly (inflation) and a recovery is in full swing, otherwise the BoC risk damaging any recovery. Low interest rates are here to stay up to the end of 2010.

  3. Hi All,
    I am currently locked in at 4.79%, and my mortgage is comming up for renewal in August 2009.
    With the variable rate dropping to 3.3%. Would it be recommended to break out of my current mortgage? and refinance with the variable rate?
    Or do you think I should wait it out until August and lock in at that point?
    Your advice is appreciated

  4. My question is this. The Bank of Canada mentioned on March 3 that it may resort to measures other than further cuts to the prime rate in order to stimulate credit markets and lending. It is going to outline its strategy on April 23. How will these measures influence bond yields? Any thoughts on whether these quantitative measures will drive bond yields up or down (and on what will happen to fixed rates?)

  5. Through quantitative easing the BOC is throwing more logs on the fire. Once the bond market sees the fire heating up yields will jump. Higher yields = higher fixed rates. The only question mark is the time it takes to stoke the economy’s fire.

  6. To Sam:
    Can you explain what you meant ” If I get within 30 days of closing, with current rates I can relock at a hair under 4%”. My broker didn’t tell me I can lock a 5-year fixed rate with a 120-day hold. I don’t know how this works? What if the penalty of re-financing mortgage increased within the 120 days?
    By the way, 3.92% with FF is good, but it only allows us to contribute extra 5% of our mortgage amount every year. It may be not enough.

  7. > I’ve locked with my broker at 4.19 for 5 years with a 120-day hold
    Sam, is this for a new mortgage or renewal? Where did u get that ? My broker’s telling me that he can’t do better than 4.34 for a renewal.

  8. Omar
    I’m in a similar situation. My 5 year term @ 4.26 % is up September 1. My bank (Scotiabank) allows a renewal 6 months in advance without penalty. I wanted to lock into another 5 year term but they would not do any better than the posted rate of 4.49%. I was very disappointed as I have been a loyal customer for almost 20 years and that seems to have no bearing anymore. So I took an Open @ prime +1 (3.5 right now). I’m now in control and can decide who I want to deal with. For now I will ride out this variable rate while I shop around.

  9. I have a question for anyone that can answer…my mortgage is up for renewal in July. I went into Scotiabank to get a 120 day rate hold. I’m not sure if I will want to go with variable or fixed when July rolls around. They told me I can only choose one(variable or fixed) to have the rate hold, I can’t have both options.I seem to think that in the past I have had both rates guaranteed. Am I wrong??
    In answer to other questions…some mortgage brokers are offering a special of 3.99 fixed over 5 years. There is only a 30 day rate hold on this and it requires a very high credit score.

  10. i have got 5 year fixed @ 4.29 with CIBC. my closing on april 1st. do u think bank can still lower fixed rates with in this month ….any suggestions wat should i do.

  11. MortgageNovice…Is the 4.15 for a 5-year? Did BMO just offer that to you or did you have to negotiate for it? Did you have any special circumstances? I didn’t think banks were going lower than their 4.49 5-year ‘special’

  12. We are currently looking at renewing our mortgage early to take advantage of the current rates. We’ll pay a penalty of $4500 but will save that in interest by the time our current mortgage would have matured.
    Right now we are locked in at 5.35% and could either go with a 4.39% fixed 5-year rate or Prime + .5% closed variable rate (currently 3.0%).
    Any guidance/recommendations would be much appreciated, my concern is obviously going for the variable rate now and then when we choose to lock in the 4.39% not being available to us. I can’t seem to find much information on speculation of where bond yields are going to trend in the coming year. It also seems like going with a variable mortgage in a ‘prime plus’ climate is a little more risky than the ‘prime minus’ climate that existed until 8 months ago or so.

  13. I just signed a 4.24% Five year fixed renewal at TD bank today. Scotiabank is a sham…I’m a customer there for banking (only because I didn’t know any better when I came to this country). They have some really Draconian (and counterproductive, in terms of profit) policies. For example, when I came into the country, I was on work visa, making over $100,000 per year, a tenure-track faculty, and they wouldn’t give me a mortgage. No wonder TD is the only bank doing OK right now!

  14. funny, scotia did really well for me, excellent customer service, 1 year no fee account worth 11 dollars, I moved my mortgage from TD to Scotia when scotia was at prime – .75 on open mortgage and TD was prime -60 with closed mortgage, TD tries not to give good deals but I think they are little easier to get things done.

  15. hey lily,
    no i just got another offer from a broker for 4.04 but prefered to go with a big bank for my first mortgage. So i told bmo and they could only match 4.15… i got a few freebies with the deal (free banking and airmiles) to make it up.
    I’m satisfied for now, let’s see if the rates go lower than 4.15 …

  16. okay guys after long struggle, i manage to get 4.05% from my present bank (TD). In fact, i forced them to get me this rate as i had better rate from National Bank of canada(in writing). Although some people here on this blog didn’t believe me when i said that.I preferred to stay with my bank as i renewed early and i had to pay penalty charges alongwith discharge fees which would have costed me even for moving out. I am happy with what i got under the circumstances.
    For those doing shopping for better rates, i would suggest that your credit scoring does makes a difference in this kind of market.
    Good luck to you all

  17. The Scotiabank representative that I saw told me that 8 months ago she would have been able to work with me to get a better rate. Now she claims that her hands are tied. Its nice to hear that some other big banks are still flexible.

  18. “Low interest rates are here to stay up to the end of 2010.” ….from VinceT
    Hey Vince. Your crystal ball is really powerful! Where can I get me one like that?

  19. My mortgage is up for renewal in one weeks time. I’m trying to decide whether to go fixed or variable. TD has offered me 3.5% 5 year open variable mortgage versus a 4.14% closed fix mortage. I might be in a position to pay off the mortgage in about 2 years time. Any advice on which one I should take based on where interest rates are heading?

  20. Hi
    I have a deal with my bank I need to sign within next two weeks. 5yrs fixed on 4.25% OR 3.25% for one year with discount of 1.25% upon renewal to a 5-year fixed rate any time during that year.
    Do you think I be better off with just going 4.25% and get pice of mind for 5 years?
    Im thinking if I renew after a year the 3.25% deal, based on current rate 5 Years is now 5.50% – 1.25% = 4.20 and I don’t know what are the chances of it going higher within a year :( its sooo stressfull hehe

  21. Ing is at 4.05 for 5 years, and you can get under 4.00 if you shop around, why take 4.25%?

  22. Hi
    I have a fixed at 4.99% and I am in the second year of a 5 year fixed. I was offered 3.3% variable with or 3.9% 5 year fixed with. What should I go with?

  23. You are more than likely in the IRD (Interest rate differential) period of your mortgage, which means if you break the mortgage you will have to pay the IRD. This can be costly to break, seek a mortgage planner to show you all the options and see if it’s worth breaking or not.

  24. I took the advice of my real estate agent and locked in my mortgage for 5 years at 5.84%. That was 18 months ago. CIBC wants a 10K penalty if I leave and they are categorically unwilling to negotiate any new agreement. Should I be shopping around for a new 180K mortgage, despite the penalty?

  25. You’d probably save $1000 or so over 5 years by refinancing to a new 5-year fixed. Talk to a broker to show you the calculations.

  26. RBC is offering us a 5 yr variable closed for 2.1%, or a 4 yr fixed for 4.09, or a 5 yr fixed for 4.45. They are offering it before our renewal without penalty. Our 4 yr isn’t up for renewal until June, and is currently at 4.95. Does the lower variable closed have any disadvantages other than staying on top of the rate so you lock in when it’s going up? Does the lower variable rate mean you pay more principle, and finish paying earlier, or just lower bi-monthly payments?

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