The posted 5-year rate reduction last week has all the trappings of a headfake. Man, how we hope we’re wrong about that.
5-year yields closed up huge on Monday and discounted fixed rates should follow if yields don’t drop soon. A few non-bank lenders have already announced fixed-rate increases, effective today.
Regardless of your position on the fixed vs. variable debate, it can’t be overstressed how low fixed rates are right now. At 3.39% for a 30-day close, 5-year fixed mortgages are a whopping 166 basis points below the 10-year average of deep-discount rates (which we’ve based on a 160 bps discount off posted rates for discussion purposes). Locking in at 3.39% is like winning a small lottery, historically speaking.
So if you need a fixed rate for a new mortgage closing in the next 180 days, be prepared to act—especially if yields continue higher.
Disclaimer: As always, only higher powers from above can predict interest rates. It’s always possible that yields could tumble back down. On the other hand, mortgages are a probability game and most would argue that rate risk is biased over 50% to the upside.
By Robert McLister
Last modified: April 26, 2014
headfake?
My wife and I are just getting financing approved today and we locked in at 3.44% 5 years fixed at RBC. The Mortgage specialist said that was the lowest rate he’s ever offered. He also told me that the 0.1% reduction last week wasn’t really a reduction, he said that their adjustment window from advertised went up 0.1%; effectively leaving him with the same rate.
We’ve been really lucky with mortgage rates in our short history… 6.5 years ago we were locked in at 4.39%, 1.5 years ago we locked in at 3.59% (both on our rental property) and our new single family home we are locked in at 3.44%. Man, I hope it’s even lower the next time we lock in!
Rob, My old trader terminology sneaks into stories sometimes. A headfake is when prices make a new relative high or low, lead people to think it’s a sustainable trend, and then reverse sharply in the opposite direction. Cheers…
Just never mind how low the rate is now. My advice to all of you out there is try to determine if you can still afford your mortgage when this low rate mortgage you are getting matures, be it in 3, 4 or 5 years. I do not have a crytal ball, but we can rest assured rates will be much higher when your mortgage becomes due. So be warned. Do your math and plan for the inevitable.
MK
What do you mean by “much higher”? My crystal ball is giving me different readings. How high can rates go if the economy grows at only 2% – 2.5% long term??
Hi MK,
Thanks for the post. There is large debate the extent of future rate increases, but budgeting for renewal is always wise nonetheless. We’ll do a separate post on this soon because it’s important to remind folks to think ahead given our ultra-low rate environment.
Cheers,
Rob