June 2021 Mortgage Rate Outlook
Rates, as well as rate expectations, are little changed over the last month. Everyone is waiting for the same thing: lockdown to be over and the economic recovery to continue.
When those things happen, conventional thinkers expect a further jump in inflation, which means a further jump in Canada's 5-year government bond yield. That should take fixed rates higher before Christmas.
As for variable rates, they're still at the mercy of the Bank of Canada. The BoC is unlikely to lift rates this year. It prefers to let inflation run hot to ensure it doesn't sink below its 2% target again.
That suggests the spread (difference) between fixed and variable rates could keep widening through year end. It's already near a one-decade high.
Here's more on Canada's upcoming mortgage rate picture...
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 all with a grain of salt because a lot can change in a matter of months.
- Bank of Canada forecast:
- The first BoC rate increase is still slated for the second half of 2022
- Source: Bank of Canada
- Consensus economist forecast:
- No overnight rate (and prime rate) hikes until the fourth quarter of 2022
- Bond yields to increase about a quarter-percentage-point through year-end
- Source: Bloomberg, economist forecasts
- 5-year fixed rate in five years:
- 3.24%, 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:
- 2.25%, according to the Bank of Canada (i.e., two points higher than today)
- That's an average of where the overnight rate is projected to land long term
- That implies a 4.45% prime rate
- Source: Bank of Canada
Value Zone
The 5-year fixed (insured, insurable or uninsured)
- Reason: Those wanting a fixed rate won't find any better value than the 5-year fixed. You're saving less than 0.15%-points, for example, to drop to a riskier 1-year fixed. Five-year fixed rates are the best protection you can buy against the risk of surging inflation. And if the BoC does not hike as much or as fast as expected, a 5-year fixed won't cost obscenely more than a variable.
- Beware: Fixed rates can have brutal prepayment charges, particularly if you use a top bank. A RATESDOTCA poll found that 47% of 5-year fixed-rate borrowers renegotiated or refinanced before maturity. You have to plan for mortgage changes even if you don't expect them. Therefore, if you lock in until 2026, be sure to consider a lender with less punitive prepayment penalties.
The 3-year variable (insured)
- Reason: With a record-low 0.95% effective rate, this one's hard to pass up. Yes, rates are going to rise as soon as 2022. But you're going to save significant interest before that happens. A 3-year also lets you renegotiate earlier (than a 5-year term) at any lender and without penalty. You can even lock into a discounted 5-year fixed if you absolutely must. (Albeit, we're not huge fans of converting into a fixed rate before maturity.) Unfortunately, this offer is good for default-insured mortgages only. If you need an uninsured variable, expect to pay 1.25% to 1.35% or more.
- Beware: As noted above, inflation risk is something everyone should take seriously. Prepare for multiple rate hikes before this mortgage matures. Maybe you'll get lucky and won't see them, but most likely, this coming rate-hike cycle will have a higher peak than past cycles, thanks partly to all the stimulus and supply shortages we're witnessing.
The 5-year hybrid (insured, insurable or uninsured)
- Reason: We report third-party rate predictions regularly, but here's the dirty secret. Those forecasts are rarely correct. A hybrid mortgage hedges your bets. It's half fixed and half variable, so you can never be too wrong. It can also be coupled with a handy readvanceable line of credit (LOC), assuming you have 20% equity or more.
- Beware: The price for this best-of-both-worlds option is somewhat higher refinance costs in five years. That's a pittance for the flexibility it affords, especially if you opt for the readvanceable LOC.
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.
