Mortgage Report

April 2021 Mortgage Rate Outlook

Rising fixed rates have resulted in a significant widening of the fixed-variable spread over the last month. That's tilted the odds somewhat in the mortgage market. Five-year fixed rates are still in the driver's seat, but the relative rate risk of floating-rate mortgages is now considerably less, especially for folks who might not need a mortgage in five years.

Here's the latest...

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 over months and years.

• Bank of Canada forecast:
  • The first BoC rate increase is still slated for 2023
  • Source: Bank of Canada
• Consensus economist forecast:
  • No overnight rate (and prime rate) hikes until the second quarter of 2022.
  • Bond yields to increase modestly through year-end
  • Source: Bloomberg, consensus economist forecasts
• 5-year fixed rate in five years:
  • 3.02%, 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)
  • This is where the overnight rate is projected to land long term.
  • That implies a 4.45% prime rate
    • 4.45% is ambitious in a 2% growth / 2% inflation environment, but near-term inflation/GDP could significantly exceed those averages, so manage your rate risk accordingly
  • Source: Bank of Canada

Value Zone

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

• Reason: Five-year fixed rates remain the best long-term fixed value if you're worried that rising inflation will continue taking interest rates higher. Indeed, bond market pricing implies that the Bank of Canada will boost its key lending rates in 2022 as the post-vaccine recovery shifts into high gear and runaway deficit spending continues.
• Beware: Fixed rates can sting you with hefty prepayment charges, particularly if you use a top-10 bank. A RATESDOTCA poll found that 47% of 5-year fixed rate borrowers renegotiated or refinanced before maturity. The best strategy for folks who need a mortgage through 2026 is this: Unless you're well off and/or need a specific product (like a big-bank readvanceable mortgage):
  • avoid lenders with punitive prepayment penalties, and
  • lock into a 5-year term to mitigate risk.

The 5-year variable

• Reason: Variables are again worth considering now that surging fixed rates have boosted the relative savings of a floating rate. Insured purchases still qualify for rates as cheap as prime – 1.46%, or 0.99% through HSBC. That's an all-time large discount from prime. Uninsured rates are just a quarter-point more. Even if you have to break the mortgage early, paying a 3-months' interest penalty on a rate in the low 1s is almost immaterial. That makes variable rates an excellent short-term mortgage alternative — given 1- and 2-year fixed rates are 35+ basis points higher. If you want a mortgage that's the best combination of low interest cost and minimum prepayment penalty, a variable may be right up your alley.
• Beware: Count on multiple rate hikes before your five-year term is over. You can, of course, lock into a fixed rate anytime without penalty, but remember that it's near impossible to precisely time a rate lock. Moreover, 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, 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.