Mortgage Report

January 2021 Mortgage Rate Outlook

Most people are coming into 2021 with fresh optimism that the Corona-plague will be defeated, or at least significantly slowed. And with that optimism comes higher inflation expectations.

But inflation is not a near-term threat. We've got rough waters to navigate this quarter. Lockdowns will depress growth and keep the inflation outlook benign long past January. They might even motivate a "micro-cut" out of the Bank of Canada (i.e., a 10- to 15-basis-point rate cut).

That means variable rates like 0.99% (for default insured mortgages) and short-term fixed rates below 1.50% will continue dazzling mortgage shoppers this month.

For those needing fixed-rate financing in the next four months, there's no rush to get a rate hold -- at least not until you see Canada's 5-year government bond yield close above 0.55% to 0.60%. If/when that level is breached, the probability of higher fixed rates will meaningfully increase.

Rate Projections

Bank of Canada Forecast: No overnight rate hikes until 2023 (Source: Bank of Canada)

Consensus Economist Forecast: No overnight rate hikes until the second half of 2022 (Source: Bloomberg)

Estimated Neutral Rate: 2.25% (That's two points higher than today. Note: this is where the overnight rate is projected to land long-term according to the Bank of Canada.)

5-year Fixed Rate in Five Years: 2.49% (This number represents Canada's current best uninsured 5-year fixed rate plus the projected increase in 5-year yields by Dec. 2025, as provided by Bloomberg)

Value Zone

Rates with exceptional value this month will look familiar:

The 5-year fixed (insured, insurable or uninsured)

• Reason: 5-year fixed mortgages cost only marginally more than variables and afford far more protection from rising rates, which could materialize by 2022 or before. Drivers of higher rates may include:
  • a post-vaccine economic rebound
  • the end of Bank of Canada bond buying
  • record deficits and bond issuance
  • extraordinary fiscal spending.
    
    Quick Tip: Steer clear of 5-year fixed rates from lenders with punitive prepayment penalties, unless you need other flexibility provided by such lenders, like a readvanceable HELOC.

The 1-year fixed (insured or insurable purchases and switches only)

• Reason: At prime – 0.75% on average, floating-rate discounts are mediocre on uninsured mortgages. Unless you're getting an insured mortgage or an insurable mortgage with 35%+ equity, one-year fixed rates are more economical. One-year terms are also far more flexible, meaning you can renew, refinance or discharge the mortgage sooner without penalty. The tradeoff is more frequent renewals, which can take 4-5 hours of your life each time.

The 5-year variable (insured purchases only)

• Reason: Insured purchases now qualify for rates as low as prime – 1.46%. That discount is a record. If you want a mortgage with the smallest possible prepayment penalty and maximum up-front savings, this is it. Just be sure to expect some kind of rate increase(s) before the five-year term is over. You can always lock into a fixed rate anytime without penalty, but it's hard to time a rate lock, and you almost never get the best rates on a variable-to-fixed conversion.

Glossary: Insured: A mortgage that has customer-paid default insurance (typically purchases with less than a 20% down payment); Insurable: A mortgage that has lender-paid default insurance and 20% equity or more; Uninsured: A mortgage without default insurance (this includes all refinances, amortizations over 25 years, purchases of properties over $1 million, non-owner occupied rental properties and other mortgages not meeting default-insurance rules).