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Reviewing Scotia’s 2-Year Fixed

Scotiabank 2-year FixedScotiabank’s 2.49% two-year fixed has been enticing borrowers since it launched three months ago.

It’s the country’s best 2-year term, priced 31 basis points below the average variable rate (competitive variables now average roughly 2.80%, or prime – 0.20%).

What’s more, Scotia guarantees your rate won’t rise for two full years, which many find attractive.

Some people, however, are taking this offer in hopes of riding out low rates for a year and a half, and then locking in to something longer. And therein lies a risk…

Scotia has sometimes allowed people to early renew up to six months in advance. That’s not guaranteed with this particular offer, but it’s possible the branch would consider it depending on rates and policies at the time.

Barring that, you can always find another lender to hold a rate for 120-180 days.

So let’s assume you take this 2-year deal and close in January, with hopes of locking into a longer term in 18-20 months before rates go up.


You’ll be able to lock in your renewal rate somewhere around July to September 2013.

By mid-2013, however, most authoritative sources (including the Bank of Canada and U.S. Federal Reserve) are calling for higher rates. We all know how error-prone rate forecasts are, but mid-2013 is as reasonable a guess as any.

That brings us to risk #1.

As a 2-year borrower, there’s a fair chance that rates will have risen 50 basis points or more by the time you’re able to secure your renewal rate. You’re clearly at the mercy of the bond market, which drives fixed mortgage rates.

Furthermore, the bond market anticipates rate hikes. That means yields will often rise one to two quarters ahead of central bank tightening.

Long story short, if central bankers and economists are correct, rates will have risen noticeably by the time today’s 2-year fixed mortgagors can secure their renewal rate.

Moreover, with today’s 4- and 5-year fixed rates just 1/2 to 3/4% above Scotia’s 2-year, it’s a big gamble (with low reward) to assume long-term rates will stay low until you’re ready to lock in. You’re saving 1/2% for two years, but 4- and 5-year mortgage rates could easily jump well over 1/2% in 18-20 months.

Timing-Mortgage-Interest-RatesHence, rather than using Scotia’s 2-year fixed to play the rate timing game (which is a hazardous game to play anyway), it’s better used as an alternative to today’s poorly priced variables.

In other words, if:

You’re well suited to a variable; and,

You believe the long-run advantage of variable and short terms will persist; and,

You think variable-rate discounts will improve in 18-20 months (a definite possibility)…

…then Scotia’s 2-year fixed is a decent tool for the job.

Sidebar: It must be noted that even variables at a cruddy rate of prime – 0.20% can potentially outperform this 2-year deal if rates fall before mid-2013. But the potential interest savings would be small.

A primary benefit of today’s variables is that they give you the option of locking in at any time without a penalty (if that’s your plan). With a 2-year fixed, you’re stuck for 18-20 months unless you pay a penalty to get out.

On the other hand, going variable and then locking in means your lender will potentially stick you with a subpar conversion rate. Conversion rates today are way above the best discounted rates.

As an example, if you get a variable at a Big 6 bank, you’ll often be quoted the “special offer” rate on conversion. “Special offer” rates are as high as 4.09% today, despite 3.19% being readily available through brokers. If you have a good relationship with a branch, you can often work them down a bit, but it takes some haggling. Either way, the conversion rate you get will still not match the rates you’d find on the street.

Rob McLister, CMT