Persistent Low Rates May Drive Short-Term Mortgages

rates-swapsYields on overnight index swaps (OIS) show that traders are betting more on a rate cut than a rate hike in the next year.

Take your pick of their reasons: modest inflation, risk from the European debt saga, Canadian mortgage rule impact, lacklustre North American growth, et cetera.

These and other factors are keeping a lid on rate expectations, despite Mark Carney’s intentional hints otherwise.

That’s got mortgage shoppers increasingly believing that rates will go sideways for the next 12+ months.

Of those borrowers who can stomach the risk, more might start seeking the lowest rate possible, regardless of term.

The variable-rate market is the typical place where people look for ultra-low rates. But you won’t find much value there currently.

A year ago, homeowners were getting prime – 0.90%. But those deals flew the coup last August and won’t be back for Lord knows how long. Today’s variables are in the prime – 0.25% range, which isn’t too hot.

Rates-on-MortgagesOne alternative, however, is the 1-year fixed. Right now you can find 1-year rates as low as 2.39%-2.49% from lenders like MCAP and RMG Mortgages. That’s the equivalent of prime – 0.61% or prime – 0.51%.

Regional credit unions also have some deals. If you live in Calgary, for example, First Calgary has led the market for months at 2.39%.

Folks who take 1-year mortgages have a bit more freedom than most. They can choose an entirely different term when they come up for renewal in 12 months. Many will choose to lock in for five or more years at that time.

There is risk, of course. Long-term rates could jump before you have a chance to lock in your renewal. But that risk is mitigated somewhat by the fact that you can secure renewal rates 90-180 days in advance, depending on the lender.

If you’re willing to trade renewal flexibility for a longer-term, 2- and 3-year terms can now be found at 2.49% and 2.69% respectively.

Just keep in mind that a 2- or 3-year term may put your renewal right in the midst of 2014/2015 rate hikes (if you give credence to economic forecasts). In addition, 2- and 3-year discounts are arguably inadequate when compared to the rate protection of a 2.99% five-year fixed.

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When evaluating shorter terms, consider whether:

  1. Your personal “balance sheet” can withstand higher mortgage payments if rates rise unexpectedly
  2. You’re willing to make higher-than-necessary payments (equivalent to at least a 5-year fixed payment) to accelerate principal paydown
  3. You’ll need to refinance or move in the next few years
  4. The trade-off between short-term interest savings and long-term rate assurance is worth it.

And, while you’re at it, some free personalized advice can’t hurt. Find an experienced mortgage professional who can run some interest rate simulations and worst-case scenarios, and be sure you’re comfortable with the results.


Rob McLister, CMT

  1. As I said many years ago – go chipest rate possible regardless of the term. Anyone who understands what is going on in Europe and arround the world knows it means sluggish economy which equals low rates.
    I feel sorry for all those young families who locked in 5 year terms, they who can least afford higher payments for some percieved “security”.
    But unfortunately young first time home buyers do not read these blogs to learn, instead listen to bank mortgage managers.
    I never waste my time sweating over what to do with the mortgage – go chip. Seems simple, and that is why it works. And it’ll work for a long time to come.
    When some reporters write to prepare for the rates to eventually go up, I wonder what data do they have to support this prediction? Because we do have historical data that shows that going short term (meaning cheapest rate) will be best in the long term. So why try to time the market, it doesn’t work just like buying stocks low and selling high doesn’t work most of the time?

  2. I have multiple rentals and I have been going short-term with all of them. I believe the era of crazy growth is over. We in North America will stagnate for years and year and years to come ala Japanese…
    Add in the Europe uncertainaty which will not fix it itself for years and years and years and we have an environment of perpetually low interest rates for the foreseeable future.
    Add in growing north american crude oil production at a 15 year high and the US consuming much less oil than the 2008 crash(Bakken now producing 650K barrels from almost nothing 5 years ago, and expected to go to 2mil barrels by 2020). Add in the fact that an OPEC cupply cut will affect Brent pricing and not as much North America due to lack of oil pipeline capacity and opposition to more capacity, it leads to cheaper oil in North America (WTI) and that leads to Canada selling cheaper oil to WTI, since we can’t send it anywhere…. It all leads to less governement revenues and potentially less high paying oil industry jobs and a Canadian government that will not likley raise interest rates anytime soon… anytime soon…
    Take advantage of those sub 2.5% rates and roll them over year after year.
    I may be wrong, but I’m rolling with it. Just one mans opinion.

  3. Leo, you made some great points…i think i’m with you, the crazy growth stage is likely gone; low rates enviro for a while to come.
    I’m in Calgary, my renewal’s up in Nov this year. 1-year may be way to go.
    Great blog post, as usual.
    amee

  4. Yeah, my dad’s friendly banker told him to follow the same advice in 1978… Yeah, 1979, 1980 and 1981 weren’t too fun for us… Dad was paying 21% on the farm’s mortgage.

  5. Sometimes prevailing interest rates aren’t solely a function of growth and/or inflation. Just ask the Greeks, Spaniards and Italians.

  6. The Euro crisis is a continuation of the 2008 credit crisis. Until they fix the fundamental problem, which I believe is that a common currency for countries which are fundamently different in policies, beliefs, taxation, etc., just doesnt’ work… We’ll still be talking about this ‘crisis’ for years to come…
    This will keep an overhang in the wold for years to come. Rates will stay low as a result.
    Demographics are shifting as baby boomers age and put further drains on economies and working forces are shrinking as a result of people having less children and having them later in life…
    The era a growth is over in North America. We’ll put along and stagnate. Japan has done it for well over 10 years now at zero percent interest rates. I think its our turn and as a result rates will stay relatively low for a long time. Great for short-term mortgage rates than can be rolled over at amazing rates for years to come.

  7. Agreed… If they didn’t share a common currency however, they could fix their problems much easier than they can now.

  8. yes, of course, but that ignores the potential advantages of careful timing. Call it selective hedging if you wish. Clearly one who buys at the top and sells at the bottom fails… The spin here is to decide whether we are sufficiently close to a bottom and therefore may be worth locking rates. Put it another way: locking 10 years at about 2.1% over 10 year Canada and less tha 0.8% over prime… when Canadas are ~1.7% is indeed a cheap source of capital, whatever metrics one use.

  9. Couldn’t agree more with Leo and Drazen. In fact I’ve been of this view since at least mid 2010. Low rates are the way of the future, and we’re absolutely turning Japanese.
    I put my money where my mouth is, by taking out a 1.7% one-year fixed mortgage in late 2010, and rolling it over in late 2011 with a 2.05% two-year fixed mortgage. Also on another property I have 2.2% for a two-year mortgage, and on another one 2.8% on a three-year mortgage.
    Would have been horrible for my cashflow to do the prevailing 5-year rates at the time (3.8% or so), and even if I’d had the 2.99% option I still would have taken the rates I did. Lower is better – keeps cash outflow at its lowest, and allows cash to be put towards other higher interest debts (or investments if you have no debts).
    Glad to see this view on rates is coming more and more into the mainstream. All the people in banks who have been saying rates have nowhere to go but up for the past four years … its in their interest for rates to go up. For economists, their job is boring unless they can start forecasting interest rates moving up. For research analysts, they want to see rates go back to “normal” so people can start talking about stocks again. For senior bankers, they want rates to move up so they can go back to their old lending margins.
    It really is sad if you look back at the range of economist forecasts for Canadian interest rates, all the way from 2008 to today, every month … always overshooting. All in consensus, too much groupthink. We need more independent unbiased thinkers like the people on this message board.

  10. My concern is stagflation… the response, and then the market feedback. No one seems to really understand stagnation (there are many theories).
    Some questions from an amateur…
    If we see significant inflation, will they attempt to control it with interest rates like they did in the early 80’s? So far we haven’t seen that, so are we actually in for two decades of stagnation like Japan? Could it be worse (Japan actually had significant exports to the western world, what are we going to do, export resources to China?).
    Last fall our inflation was over 3% and my mortgage rate was only 2.25%, so my ‘real’ interest rate was actually NEGATIVE! Yay for me! But that just can’t go on for ever, banks need to MAKE money (and you don’t see many variables well under prime anymore).
    Same with the bonds, as long as there’s no inflation (and foreign investors see them as safe), they could remain cheap. But they’re barely making any profit right now… banks are making a profit because they’ve increased the spread. If we’re in for a Japan-like scenario, will we eventually see those spreads decrease?
    If there are fewer new mortgages with the new regulations, will we see more competition with rates?
    I’m hoping the answers to those last two questions is yes. :D

  11. I’d like to see 10 year rates come down to 3.49%. I don’t see why they can’t. The 10 year bond is only .5% higher than the 5 year bond and 5 year rates are at 2.99%.

  12. But Loanz, 5 year rates aren’t really advertised at 2.99 … that’s the “hush hush” rate.
    So perhaps by the same token, 10 year rates are available at 3.49 on a “hush hush” basis … who knows

  13. I thinks it is very important for first time home buyers to read these message boards for people who need to educated them selves on what to do when to they need a mortgage,after reading all of message board notes short term is the way to go with lower rates, i have a Variable mortgage at 2.90 % with renewal in Jan 2015. im going short and i will have a lower rate

  14. Most lender’s 10yr rates are way above 4%, whereas only a few lenders have below 4% on 10 yr money right now. With 5 yr rates however, almost everyone is 3.29% and lower.
    What does it mean? More competition = better rates. Since most of the big dogs are well over 4% on 10yr rates, the guys offering them below 4% don’t need to sharpen the pencil any more than they already have.

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