As many as 85% of new mortgagors are choosing fixed rates, says CAAMP. It makes you wonder, what is it going to take to get that number back to its historical average of ~65%?
For one thing, the fixed-variable spread (i.e., difference between fixed and variable rates) needs to widen. With today’s typical 5-year fixed at 2.84% and discounted variables at 2.45%, that spread is currently ~39 basis points.
As a rough rule of thumb, when the fixed-variable spread hits 100 basis points, demand for variables noticeably increases. Spreads are currently a ways off from that point, but we may inch closer this summer.
Despite prime rate being stuck at 3.00% for 1,000 days now, floating rates have slowly been improving. They’re being aided, in part, by falling short-term funding costs. The 1-year LIBOR (chart below) is a very rough proxy of these.
The proof is in lender offers, and the latest comes from RMG Mortgages. Last week it launched a prime – 0.50% product (more on that below). That’s the biggest variable discount of any national lender since 2011, when they hit prime – 0.90% (or better).
The fixed-variable spread is also widening because of slightly higher long-term rates. The 5-year yield (which leads fixed rates) hit a fresh 4-month high today at 1.53%, before falling 6 bps on concerning news that U.S. manufacturing contracted.
There’s no way to tell if the recent spurt up in bond yields has staying power. Considerable resistance lies above at the 1.55% to 1.60% level. Yields have been rebuffed twice before when attempting to pierce that range. Until they do, odds are low that 5-year fixed rates and the fixed-variable spread will increase significantly.
Conversion: Can be converted free of charge to a Low Rate 5-year fixed or standard 5-year fixed
Penalty: 3% of outstanding principal
Increase & Blends: Not available
Maximum Mortgage: $750,000
Online Account Access:Not available
Pre-Approvals: Not available
Rate Hold: 90 days
RMG’s rate is solid but some will be skeptical about the restrictions of this product. Given the above-average penalty, it’s a product geared to people who expect minimal changes to their mortgage for five years. That includes the minority of variable-rate borrowers with less than 20% equity.
That said, you can reduce the penalty by converting to RMG’s standard 5-year fixed (with its normal 3-month interest/IRD charge). The penalty is also partially rebated when a client gets a new mortgage from RMG within 90 days of discharge.
Rob McLister, CMT
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