OK let’s rephrase that. It’s not the time for a 10-year fixed for well over 90% of Canadian mortgagors.
There was a time last year when the spread between 10-year and 5-year fixed rates was below 3/4 of a percentage point. That made even the 10-year scoffers among us rethink our positions. But spreads are now back over 1%. That means 10-year terms simply aren’t worth the interest premium anymore (for all except the most payment sensitive borrowers).
Historically, the odds are stacked against 10-year terms (more on that). But the real turn-off is the fact that 5-year rates would need to climb 2.50% higher by the time a 5-year fixed matured, in order for a 10-year to cost you less.*
That could happen of course, but life is an odds game; the rate risk factors just aren’t as threatening as in the past:
- Inflation is well managed (in fact, it’s currently below the BoC’s target, which is worrisome, and this won’t be the last time)
- We have a structural unemployment problem in certain sectors–especially manufacturing
- The U.S. is now far more energy independent (meaning less exports from Canada)
- Global outsourcing is picking up momentum…still
- We’re relying on an overleveraged hyper-rate sensitive consumer
- and the list could go on…
If you’re curious where the professional ball gazers are throwing their darts, TD and Desjardins (two of a handful of firms that publicly publish long-term rate forecasts) see a roughly 2.25 percentage point jump in 5-year government yields by year-end 2018. (Bond yields lead long-term fixed rates.)
But interestingly, Desjardins projects just a 1.46 bps jump in 5-year mortgage rates during that same period (which implies spread compression between mortgage rates and funding costs).
In any event, if Vegas posted 2.50% as the over/under for how high 5-year rates would go in 60 months, well-qualified Canadians would be smart to bet on the under.
* Assumes a 25-year amortization and equal payments (i.e., it assumes you’ll make a 10-year fixed payment on the 5-year fixed mortgage)
Rob McLister, CMT