Will 5-Year Mortgage Rates Fall Further?

Mortgage-Rate-Direction Banks last raised mortgage rates on June 9, when the 5-year bond yield was at 2.68%.

Since then, the 5-year yield (which guides fixed mortgage pricing) has fallen to 2.44%, but bank rates have not budged.

BMO economist, Doug Porter, told the Toronto Star it’s because banks “want to be convinced that it is not a flash in the pan and that any retreat in yields is sustained.”

He says: “I believe that we are probably not too far away from that point. It might take a little more of a deeper rally (in bond prices) to make it completely convincing.”

The often quoted CIBC economist, Benjamin Tal, thinks yields could fall another 0.05% to 0.10%, but any drop in fixed-rates will be short-lived. “By the end of the year, we’ll start seeing rates rising,” he says.

If rates do drop another 0.10%, it would translate into a $5.50 monthly payment savings for every $100,000 of mortgage. That’s a total savings of $478 over five years, assuming a 25-year amortization and typical fixed rates.

But remember, trying to time bond and mortgage rates is financially hazardous.  While you’re waiting, rates can move the wrong way—quickly.

You’re usually better served by focusing on factors that can dwarf a 0.10% rate savings, like finding a mortgage with the optimal term and just the right amount of flexibility (pre-payment options, openness, readvanceability, etc.).  Too much flexibility is a waste, and too little can cost you in the long-run.

  1. Since this morning, 5 yr govt. bond prices are on a tear and currently 2.50% so that flash in the pan might well be true.

  2. By far the most important thing to watch out for in a mortgage (apart from the rate of course) is the IRD penalty. This often overlooked feature of most mortgages is absolutely destroying most people who would like to re-finance in these very difficult times. Instead of a mere 2 or 3 months interest penalty to re-finance, most of us are stuck with horrendous IRDs of $20,000 or more, thus completely eliminating any chance of trying to claw back some of the money we’ve all lost in this once in a century recession. Pick a mortgage that doesnt have an IRD and you’ll be very thankful you did in future. Prepayment options etc really mean little to most people. I mean, who can actually afford to pay MORE against their mortgage than their standard monthly amount? Most people struggle to pay the minimum.

  3. Agreed – but how rare is it to find a 5 year fixed mtg without the IRD?
    Rob? – Is it offered by many lenders?

  4. Hi Dan,
    Off the top of my head, I can’t think of any mainstream 5-year fixed lenders without IRD penalties.
    As much as everyone hates them, they’re a fact of life for 5-year fixed-rate mortgagors. Maybe someday we’ll see a lender differentiate itself without an IRD, but I don’t expect it soon.
    By the way, if anyone knows of a major 5-year fixed lender that does not have the IRD, please share!
    Thanks,
    -rob

  5. Prospera Credit Union in BC has a 5 year fixed product with no IRD, but the penalty is 12 months interest.
    Any lender that does not charge IRD is reckless. Way too much risk to take on.

  6. Lenders couldn’t operate without charging IRD. Example: why would a lender pay brokers full commission for a deal that could be gone in a month? And what about all the break funding costs the lender would incur? Consumers tend to think of the IRD penalty as a cash grab but it is used to pay real costs.
    The only way to offset this (and it wouldn’t end up working for obvious reasons) would be to charge a substantial upfront fee or to offer a much higher interest rate. Essentially customers would pay the break funding costs upfront or on an ongoing basis, even if they never ended up using the option.
    At the end of the day, both the lender and the borrower have to benefit from entering into a contract with each other and without an enforceable IRD penalty the lender’s risks far outweigh its rewards.

  7. The only 5 year fixed on the market not completely involving IRD is President’s Choice…if you chose their “basic” option (acutally their best rate), mortgage is in lockdown for 3 years (no discharge without bonifide sale), but after becomes 3 months interest only.
    Small difference perhaps, but not to somebody who signed up for a 5 year fixed 3 years ago.

  8. @Dave L – amen.
    It would be prohibitively expensive for banks to offer people fixed options that protected borrowers in a rising interest rate environment, but also offered borrowers an easy out in a falling rate environment. Sort of a “heads you win, tails I lose” proposition for lenders.
    If you don’t like IRDs, get an open or a variable. As mentioned in a previous post, I’m not sure how IRDs are “destroying” people. If a mortgage was affordable before interest rates started to fall, why is it suddenly unaffordable?
    Al R

  9. Al R, I understand your point, “If a mortgage was affordable before interest rates started to fall, why is it suddenly unaffordable?”
    But truth is things HAVE changed for the vast majority of people out there. A world wide recession / depression will do that. I agree that contracts have to be fair to both parties but IRDs is not something I heard anyone talking about a couple years back, certainly not Brokers or Lenders. I only found out about mine recently when I enquired as to what penalty I would face if I needed to sell my property soon. I would be selling for a loss and to add insult to injury, a $20,000 IRD penalty (or thereabouts). And no, I wouldnt be selling my property out of choice, but having a Company wide pay cut forced upon you (in additon to losing a large portion of my investment savings in the market crash last year) with little chance of finding another job in this market tends to make you re-evaluate your financial position.
    There is a website on IRD where many, many people share their equally frustrating stories.
    http://www.ellenroseman.com/?p=414
    I think having a 2 or 3 month penalty seems fair but to substitute this for an IRD of VASTLY more money just doesnt seem right or ethical to me.
    Kind regards.

  10. Sure a very low rate on a 5 year is always nice to have and boast about but conditions changes (employment, marital status, health) and you never know when you’ll have to sell you house.
    That’s why I believe there’s no reason to sign for more than 2 years. And signing for 5 is just looking for trouble, IMO.

  11. Al, I appreciate your frustration. These are tough and frustrating times we live in (like many others, I have also be negatively impacted by market changes.)
    To be fair though, IRD has been around for all of my 10+ years in the industry and it is outlined quite specifically in the mortgage contract so maybe the real lesson here is that people should be very sure that they understand all of the terms in a contract before signing.

  12. Al,
    If you bought a GIC at the bank for 5 years paying 5% a year and after 1 year the bank said sorry, we are going to cancel the contract and give you $50 for your troubles but now we are going to only give you 1% for the remaining years (not 5%) because that is the new market rate, would you think that is OK? I am sure you scream bloody murder if someone tried to do that to you.
    Lesson here, with a guaranteed interest rate comes a certain degree of responsibilty. Definitely brokers need to be upfront about potential penalties as opposed to just advertising the lowest rate. If all your broker is offering you the best 5 year fixed rate, find another broker.

  13. AL, fortuantely you are always afforded a choice. If you have a problem with IRD’s on closed mortages, then you can fully avoid them and choose a open mortgage or fund your property with a HELOC. A closed mortgage is a fixed contract for people who want to hedge and be protected against rate increases for the entire term selected. You can’t have it both ways without paying for that flexibility and responsible mortgage brokers should always explain thier clients options.

  14. I agree, the lesson is AVOID 5 year mortgages no matter how hard the Banks are trying to sell them to you. If i make it to 5 years then there is no way ever I’ll lock into a 5 year arrangement ever again. 1 or 2 yrs is plenty in this ever changing world.

  15. Al,
    I am sure your perceptions would change if the rates were to hit the early 1980 levels.
    At the end of the day, a 5-Yr fixed is for someone who is willing to pay for the ‘certainty’, not for those who want to pay less if the rates go down. (needless to say they will pay more when the rates go up !)
    I hope most here would have watched ‘American Greed’ on CNBC. I agree, American’s aren’t the only ones who can be greedy :-)

  16. John, you miss one important point. The so-called ‘certainty’ of 5 year rates is really a bit of a con. Yes, the rate itself is certain but nothing else in this world is certain and a great many things can and regularly do happen to many people during a 5 year period in their lives. What I’m saying is, with the benefit of hindsight, its now very apparent that doing what was considered (and advertised and promoted to be) to be the safer option, i.e. fixing a rate for 5 years actually carries MORE risk than with a shorter term duration mortgage. Not because rates have fallen dramatically. But because of this IRD situation which many of us find ourselves in, while on the one hand we are holding property that has fallen $50,000, $80,000 or more in value since we bought a home and now hit with the double whammy of a huge penalty if we are forced to sell due to job loss or other financial obligations caused by the recession.
    So, all I’m saying is, a 5 year fixed mortgage should be viewed as having just as much risk, if not more, than by going variable or short term. Yes, you fix the rate, but you also restrict your life choices for a 5 year period. That to me, is not a low risk choice.
    Now that I know more, I will be able to make better decisions in future.
    Good luck all.

  17. Remember though, even IRDs can sometimes be negotiable if you’re a good credit risk… and if you’re lucky.
    My IRD went from 6 months’ interest to less than 1 month’s interest because I threatened to go to another lender.
    That’s something I wouldn’t count on of course. Nonetheless, it’s worth pointing out that the IRD penalty your lender first quotes you may not be their final offer, after some arm twisting.

  18. Al,
    The risk you are talking about is not the risk of the five year mortgage. It’s the risk of losing job, losing home values etc. The five year mortgage didn’t fail you. It’s the decrease in house values, and the lost job that would force someone into the position you are describing.
    No mortgage would be low-risk if someone loses their job and couldn’t find another one for a year or two.
    When Canadians buy a house, I hope they assess the stability of of their jobs too. If someone is buying just because he/she has a good income today, without thinking about tomorrow, then sure that person is bound to go through roller coasters compared to someone who has a steady job.

  19. John, good points. But in todays reality I think very very few people could realistically say they have a ‘steady’ job. Most careers appear steady in a normal economy. Many people with 20 years experience in all sorts of industries are really feeling the pinch right now.
    You are correct though, in that a 5 year fixed mortgage didn’t fail anyone, but its the restriction on one’s life choices that perhaps many people (including myself) don’t think about quite deeply enough when entering into such an agreement. I think we all can learn from our experiences and difficult times makes us wiser in the long run.
    thanks for taking the time to reply.
    Eug – interesting that you negoiated a reduction in IRD penalty. I havent heard of that before. Firstline were not willing to entertain that notion in my experience, by the way.
    regards
    Al

  20. I really wish I had thought things through before locking myself into a 5 year fixed term…
    One year in and I need to move out of the town somehow.

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