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Fixed-Prime Spread At A 30-Year High

The spread (difference) between discounted 5-year fixed and 5-year variable mortgage rates is currently about 240 basis points (bps).

Based on our estimates, (we don’t have historical pricing on discounted fixed and variable rates), that is one of the biggest spreads in a very long time.

If you compare the posted 5-year fixed rate to prime rate, the spread between the two is 360 bps.

That’s the biggest spread in the last 30 years (based on monthly data from the Bank of Canada). Click on the chart below for a close up.


Technically, today’s posted fixed-prime spread is tied with the 360 bps reading we saw last summer.  The difference is that variable rate discounts last summer were nowhere near the prime – .50% we have today.

To put it another way, today's plump fixed-prime spread indicates what many already know:  fixed rates are selling for a major premium over riskier variable rates.

This is not meant to be predictive, but consider this:  If you look back to 1980 for cases where there’s been a 2%+ fixed-prime spread, prime rate has never averaged more than 1.75% higher in the five years that followed.

Will 2010-2015 be the first such instance?  Time will tell.  But one thing’s for certain.  Today’s fixed rates are trading with a huge built-in “insurance premium,” and the 2.40 percentage point edge gives variables a big head start as we move into the next rate hike cycle.