Mortgage Report

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This month's briefing
Updated on Jul.1.21
Suddenly, the market doesn't think rates will go as high, but prudent borrowers will ignore this noise.
The venerable 5-year fixed still offers the best risk/reward to most borrowers, but not all.
Hybrid mortgages are underappreciated, but a solid value around 1.75%.
Today's Headline
What Today's Bank of Canada Announcement Means to Mortgagors
The Bank of Canada stuck to its long-standing script today.
Sep.08.21
Average 5yr Mortgage Rates for the Last 10 years

Canadian Mortgage Rate Comparison (Rate Matrix)

Evaluate Canada’s best mortgage rates in one place. RATESDOTCA’s Rate Matrix lets you compare pricing for all key mortgage types and terms.

Rates are based on an average mortgage of $300,000

Insured 80% LTV 65% LTV Uninsured Editor's Tips
GREAT RATE

August 2021 Mortgage Rate Outlook

Rates in the bond market took a downturn in July. Seemingly overnight, investors' anxiety over inflation morphed into worries about an economic slowdown.

But despite falling yields, market expectations for the first Bank of Canada rate hike haven't changed all that much. We're still looking at mid-next year for that, say economists.

What has changed is market expectations of how high rates could go when the Bank is finished tightening monetary policy.

"...Markets no longer expect the BoC to breach the peak rate seen in the 2017/18 tightening cycle," said CIBC Capital Markets last week. The "terminal" rate for Canada is now expected to be about 1.75%, or 1.50 percentage points higher than today.

"Similarly, markets now see the Fed topping-out nearly four [25-bps] hikes below the peak in their prior cycle, which ended in 2019."

Here's more of what the market expects...

Rate Projections

The predictions that follow are based on Bank of Canada forecasts and implied (future or forward) rates in the bond market. Take them with a pinch of salt, as implied market forecasts are forever subject to change.

  • Bank of Canada forecast:
    • The first BoC rate increase is still pencilled in for the second half of 2022
    • Source: Bank of Canada
  • Consensus economist forecast:
    • No overnight rate (and prime rate) hikes until the third or fourth quarter of 2022
    • Bond yields to increase about 0.22 percentage points through year-end 2021
    • Source: Bloomberg, economist forecasts
  • 5-year fixed rate in five years:
    • 2.96%, which represents today's best nationally available uninsured 5-year fixed rate plus the projected increase in Canada's 5-year yield by 2026
    • Source: RATESDOTCA, Bloomberg forward rates
  • Estimated long-term "neutral" rate:
    • "Neutral" refers to where the BoC and investors believe the overnight rate will land long-term
    • The number is:
      • 2.25%, according to the Bank of Canada (i.e., two points higher than today)
      • 1.75%, according to bond market-implied pricing, as reported by Bloomberg (i.e., 1.5 points higher than today)
    • That implies that prime rate will top out somewhere near 4.45% in the next five years or so (it's at 2.45% today)

Value Zone

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

  • Reason: Lower yields notwithstanding, there's no justification to abandon the safe play and lock in. That is, for risk-averse borrowers who plan to remain in their homes for five years.
  • Beware: Fixed rates often have brutal prepayment charges, especially if it's a major bank mortgage. RATESDOTCA surveys find that nearly half (47%) of 5-year fixed-rate borrowers renegotiate or refinance before maturity. Hence, you never want to overlook prepayment policies just to save a few basis points on your mortgage rate.

The 3-year variable (insured)

  • Reason: With falling rate-hike expectations, intelliMortgage's record-low 0.95% effective rate is looking better and better. It's still the lowest rate in Canada (ever). With a cheap 3-months' interest charge for early termination, a shorter contractual term and the ability to lock into a discounted 5-year fixed rate anytime without penalty, it's a mortgage with flexibility. (Note: We don't usually recommend people convert into a fixed rate before maturity, but it's an option.)
  • Beware: Canada is facing some of the most elevated inflation in decades. That's not conducive to rates remaining near their "effective lower bound," as the BoC likes to call it. Rates will head higher and this 0.95% rate won't last when they do. But with a 0.59-percentage-point upfront rate advantage versus a comparable 5-year fixed, you get a decent head start.

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

  • Reason: With so much uncertainty over how high rates might go, a hybrid mortgage diversifies your rate risk.
  • Beware: You get a mortgage that's half fixed and half variable, leaving you with meaningfully less interest rate exposure. But being half right on rates also means you're guaranteed to be half wrong.

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, all amortizations over 25 years, purchases of properties over $1 million, non-owner-occupied rental properties and other mortgages not meeting default-insurance rules).

Reader note: The generalized guidance above doesn't apply to all because everyone's circumstances are different. It's a good idea to consult a mortgage professional for advice focused on your personal finances, goals and five-year plan.

Rate trend indicator (Lender profit margin)

5-year fixed
Current Lowest Rate Current
Fair Value Fair Value
5-year variable
Current Lowest Rate Current
Fair Value Fair Value

"Current Lowest Rate" is based on the lowest nationally available uninsured rates.

"Fair Value" is where the lowest rate should be given current bond yields and historical spreads.

Key rates

These values are as of July 22, 2021:

  • Bank of Canada Overnight Target: 0.25%
  • Minimum Qualifying Rate: 5.25%
  • 5-year bond yield: 0.79%
  • Prime Rate: 2.45%
  • 5-year Fixed (Insured)*: 1.99%
  • 5-year Fixed (Uninsured)*: 2.14%
  • 5-year Variable (Insured)*: 0.99% (prime – 1.46)
  • 5-year Variable (Uninsured)*: 1.34% (prime – 1.11)

* Lowest nationally available mortgage rates.

Key economic numbers

The economy continues its recovery. Here are the main indicators worth watching:

  • Average Core Inflation: 2.3%
  • National Unemployment Rate: 7.8%
  • Real GDP (Q1): +5.6% annualized
  • Oil (WTI Spot): $72.06

Future Rate Expectations

  Current Projection (In One Year) Summary

Bank of Canada overnight rate

0.25% 0.50% The first BoC rate increase is still slated for the second half of 2022

Prime rate

2.45% 2.45% Based on the median consensus of forecasts from the Big 6 banks.

5yr bond yield

0.79% 1.04% The bond market expects the 5yr bond yield to be 0.25%-pts higher 12 months from now.

Average 5yr fixed rate

2.07% 2.96% (in 2026) This represents today's best nationally available uninsured 5-year fixed rate plus the projected increase in Canada's 5-year yield by 2026.

Bank of Canada overnight rate

0.25%
0.50%
The first BoC rate increase is still slated for the second half of 2022

Prime rate

2.45%
2.45%
Based on the median consensus of forecasts from the Big 6 banks.

5yr bond yield

0.79%
1.04%
The bond market expects the 5yr bond yield to be 0.25%-pts higher 12 months from now.

Average 5yr fixed rate

2.07%
2.96% (in 2026)
This represents today's best nationally available uninsured 5-year fixed rate plus the projected increase in Canada's 5-year yield by 2026.

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