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…
Against this backdrop, some feel that five-year rates may have a hard time rising even 200 basis points in 60 months.
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
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