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Variable vs. Fixed Rates – The Latest

Rates-on-MortgagesAs 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.


(Click to enlarge – Chart by Quotemedia)

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.


(Click to enlarge – Chart by

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.

More on RMG’s New “Low Rate Basic” Variable

  • Rate: Prime – 0.50% (2.50% today)
  • Term:  5 years
  • Lump-sum prepayments: 20% annually
  • Payment increase option: 20% annually
  • Loan-to-value:  High-ratio insured only
  • 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
  • Portable: Yes
  • 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