The 5-year government yield (which influences 5-year fixed mortgage rates) closed at 1.998% on Monday, its lowest level in 17 months.
Friday's all-important job reports will determine if bonds hold the 2.00% level for the short-term. Employment expectations are pretty low, so it wouldn’t take much for a positive surprise.
If yields do stay below 2%, we may see discounted 5-year rates inch a bit lower. Lenders currently have plenty of spread (profit) in today’s typical 3.59% five-year fixed.
As usual, economic performance (both here and in the US) will influence bonds over the medium-term. BMO expects “Canadian bond yields to decline a bit further in the coming six months and then [turn higher] once the Bank of Canada resumes tightening.” (Bloomberg)
CIBC predicts “a pause in rates until May.”
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Sidebar:
- Bloomberg recently surveyed 14 major economists and their consensus is for the next BoC rate hike to come in 2nd quarter 2011. (Businessweek)
- Reuters says the markets are pricing in an 89% probability of no change at the BoC’s next meeting on October 19.
- TD’s latest forecast calls for a 5.50% prime rate and a 4.35% five-year yield by year-end 2014. That’s a 250 and 235 basis point increase respectively. Based on historical spreads, that suggests the following rates in four years:
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- 5-year variable rates: 4.75%
- 5-year fixed rates: 5.60%.
Of course, we don’t have to remind most readers how big the margin of error is in long-range forecasts.
So a 5 yr. at 3.49 is a steal?
or would you go with a minus.85 variable?
I would go variable -0.85, but I like playing the game.
Try think outside the box a little. There are more options than just 5 year fixed and variable mortgages. Look at 1 year or 3 year fixed mortgages for example. The numbers support them in this market.
Yes, I just took a 1-year fixed at 2.00% and am quite happy with that … hopefully in a year from now variables will be offered at prime – 0.1% (which is equivalent to the old prime – 0.75% before the banks failed to pass on one of the recession’s rate cuts).
If you believe prime rate will go up over 1.50% in the next 18 months then the 3.49% is the “steal” of those two choices.
OK I’ll bite. What lender has a one year fixed at 2%?
Going variable will definitely win over the next 5 years. If you have sufficient cash-flow should rates creep up, you’d save a bundle of interest.
How do you know that a variable will win? Honest question.
Yes, please explain
Prime would have to increase noticeably over the next 5 years in order for today’s rates to hit the same level borrowers are getting for a 5-year fixed. The advantage obviously narrows with rates such as 2.90% for the 3-year offer out there. However, the 5-year fixed option is certainly not looking competitive given the macro picture. There is always risk, of course, but for the time being it doesn’t appear rates will rise quickly enough. Provided the decrement to prime would head lower, and I believe that Prime – 1% is certainly on the horizon by year’s end (we’re presently at prime – .75%), this means Prime would have to head up to 4.5% to 5%. The only way this would happen if the U.S. and Europe miraculously come out of their slump within a relatively short period of time. This doesn’t look like it’s going to happen. The U.S. consumer is de-leveraging and not spending, the Europeans are in the midst if painful austerity measures, even emerging markets are showing signs of slowing down. For growth to return to levels where the Bank of Canada can raise rates again we would need a resurgent U.S. economy. For the time being this is not happening. In fact, the Fed are re-considering QE policies. The problem is those won’t really help.
Thanks for a reasoned response Lior.
Why does DesJardins and Td predict higher rates in 4 yrs? (to attempt to drive the market up????)
I think I’ll take the 3.49 and be happy I’m not paying 4.5 or 5%
Those banks were also predicting lower rates by year end 2010, but they’ve revised those forecasts downwards, I guess there’s no reason they couldn’t be overestimating again for next year and beyond?
What do people think about when/if the banks will give back the 25 bps to prime they took away when rates headed down?
Lior said: this means Prime would have to head up to 4.5% to 5%. The only way this would happen if the U.S. and Europe miraculously come out of their slump within a relatively short period of time. This doesn’t look like it’s going to happen.
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This is the only way that prime would increase, how so? If only domestic monetary policy was that easy to nail down!
Things may be gloomy today but today is no indication of six months from now. I think we all know how fast expectations can change. A 4.5% prime is totally within reach in 18 months. If that happens then a low fixed rate will probably turn out to be cheaper.
You’re not making a huge mistake if you are locking in for 5 years @ 3.49%. Assuming the BoC will begin raising rates after a 6 months hiatus, and then only 3 times a year at 25 bps each, where prime maxes out at 4.75%, you should be indifferent. In fact, you could pay a bit of a premium to be in the FRM for the certainty. The only way you will be way offside if prime goes the other way. Also, the banks will not give back the prime cut they neglected to pass on.
AC – never? Ever? Why so negative?
Guys, yields just hit a fresh 18-month low again today … 1.89% on the 5-year GoC, which is the lowest since April 22/09 … pop the champagne, mortgage rates are coming down!
Guys, yields just hit a fresh 18-month low again today … 1.86% on the 5-year GoC, which is the lowest since April 21/09 … pop the champagne, mortgage rates are coming down!
I think the banks will help the governments in signaling the crisis is over. So. I’m afraid they will increase the prime rate every year, from now. Next year will be probably 4%. They will still be attractive for home buyers because they will probably better discounts. The discounts have less visibility than the prime rate.
I think the best solution is a split mortgage, 1 part variable, another part fixed. You’ll not win too much but you cannot also loose. However I intend to make some prepayments. How much I will prepay in every part it depends on the mortgage market. Currently, I I have 2.25% for variable interest part (3-0.75) and 3.67% for fixed interest, both closed 5 years.
Overall it’s a a bit under 3%.