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Falling fixed mortgage rates

Fixed mortgage rates are falling. Experts explain why and weigh in on fixed vs. variable

Both existing homeowners and new homebuyers are benefiting from a drop in interest rates seen over the past week.

Following last week’s Bank of Canada interest rate cut, which lowered rates for existing variable-rate mortgage holders, bond yields also plunged, triggering reductions in fixed-mortgage rate pricing.

Last week, Government of Canada bond yields, which influence fixed mortgage rates, slipped 36 basis points before partially recovering. Mortgage providers across the country responded by lowering their fixed mortgage rates by as much as 25 basis points, or 0.25%.

Rate reductions were seen across all terms, although predominantly in 3- and 5-year terms.

Mortgage broker and rate analyst Ryan Sims told CMT the rate drops are due to last week’s Bank of Canada rate cut, as well as the rise in bank mortgage default rates and weakening economic data, including slower-than-expected GDP growth and easing inflation.

“Also, let’s keep in mind that 5-year fixed rates—even after this recent slide—are still about 20 bps higher than where we were back in January,” Sims said. “‘Range-bound’ would be a good term [to describe the latest rate movement].”

“But if we continue to see inflation slip lower, that should be supportive of higher bond prices and lower yields,” he added. “Of course, if we start to see inflation pick back up, then expect the opposite. 

Big banks are the big exception

While most lenders have been busy lowering their rates, the Big Banks have remained largely silent.

Posted special rates from all of the big banks remain practically untouched over the past month, aside from some discretionary pricing, sources say.

As Ron Butler of Butler Mortgage has told CMT in the past, interest rates typically “take the elevator on the way up, and the stairs on the way down.”

Sims speculates that the chartered banks are hoping to take some profit as they see their loan losses mount.

“Over the last six months, the Big 5 have written off over $3 billion of bad debt…and no, I don’t mean loan loss provisions,” he said. “Being a little slow to drop rates will give them a little padding to make it back up, albeit slowly.”

Sims also believes the banks want to see if last week’s rate changes are a ‘knee-jerk’ reaction to the Bank of Canada rate cut, or if they’re more sustained. If the rate cuts hold, he suspects rate drops from the big banks will follow in the coming week or so.

Where do rates go from here?

Expect mortgage rates to fluctuate going forward, taking their direction from bond yield movements in response to economic data.

“The path for rates will remain unpredictable as always, and certainly not a straight line down,” Sims said.

Similarly, Butler tells CMT that rates will trend lower from here, the journey will be uneven.

“Expect a bumpy decline, but eventually lower rates than today,” he said, adding that borrowers shouldn’t expect any mortgage rates below 4% this year.

As it stands, the lowest nationally available mortgage rate currently stands at 4.59% from Citadel Mortgage. That’s for 5-year fixed default-insured mortgages only, or those with a down payment of less than 20%.

Which mortgage offers the best value?

But while 5-year fixed mortgage rates are currently among the lowest, borrowers may be wary about locking in for such a long term given the likelihood that rates will continue to decline from here.

That begs the question: for today’s mortgage shoppers, which mortgage term currently offers the best value over the term of the mortgage?

For Butler, the answer is a 3-year fixed mortgage, which can be had for as low as 4.84% for a default-insured mortgage and 5.19% for a conventional mortgage, according to data from MortgageLogic.news.

While Sims said he tends to favour variable rates over the longer term, he finds the spread right now is too great at roughly 115 basis points, and thinks a fixed term makes more sense.

“For the variable to make sense, you would need to see another five cuts [in addition to the June rate cut] to break even,” he told CMT. “Will we get five cuts? Probably, however the timing may take a lot longer than people realize.”

That could result in variable-rate borrowers overpaying at the beginning of their term in the hopes of lower rates down the road. But Sims says the other factor to consider is that banks and other lenders don’t pass along the full magnitude of the rate cuts, particularly if mortgage losses start to mount.

“If someone is comfortable with the payment, then the fixed mortgage will win out,” he added. “Less stress, less hassle, and a lot of predictability. And in today’s environment, predictability is worth something.”

However, mortgage broker Dave Larock of Integrated Mortgage Planners recently posted some comparisons on fixed rates vs. variable and how each would perform under several different scenarios.

His conclusion? Depending on the simulation, either product could be a good choice and save the borrower money over the longer term.

“There is no way to know for sure where rates are headed, but if we are, in fact, near the peak of the current interest-rate cycle, the odds should favour variable-rate mortgages,” he wrote.

“[But] if you’re a more conservative and risk-adverse borrower, I think 3-year terms are still the best choice among today’s fixed-rate options,” he added.