Mortgage Report

February 2021 Mortgage Rate Outlook

Canada's rate market has never been this flat for this long. Bond yields — which influence fixed mortgage rates — just keep drifting sideways in a quarter-point range, as they have for nine months. That's a remarkable historical anomaly.

The Bank of Canada's overnight rate, which underpins variable mortgage rates, is just as flat.

But make no mistake, there is pent-up demand ahead from a locked-down economy that's coiling like a spring. We just have to play the waiting game as people slowly get vaccinated. The more who do, the closer we get to that first Bank of Canada rate hike. That's the consensus economist view, anyway — to the extent you put faith in economists.

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 the course of 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 hikes until the second quarter of 2022.
  • Bond yield increases to start this year.
  • Source: Bloomberg (consensus economist forecasts)
• 5-year fixed rate in five years:
  • 2.49%, which represents Canada's best uninsured 5-year fixed rate plus the projected increase in 5-year yields in 2026
  • Source: RATESDOTCA, Bloomberg (forward rates)
• Estimated neutral rate:
  • 2.25%, or two points above today's level.
  • This is where the overnight rate is projected to land long term.
  • Source: Bank of Canada

Value Zone

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

• Reason: The best risk/reward today comes from a 5-year fixed. They cost only marginally more than a floating rate upfront, and shield you from rate increases that could come as soon as next year, if economists have any clue. Drivers of higher rates may include:
  • a post-vaccine economic rebound
  • the end of Bank of Canada bond-buying
  • record deficits and bond issuance
  • sky-high deficit spending in Ottawa.
• Beware: Longer-term fixed rates can entail big prepayment charges, especially if you choose a top-10 bank. A RATESDOTCA poll found that 47% of 5-year fixed borrowers renegotiated or refinanced before maturity.
  
  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: A 1-year term is the most flexible option in the market. In just 12 months, you can renew, renegotiate, refinance or discharge the mortgage without penalty.
• Beware: The tradeoff is more frequent renewals, which can take 4-5 hours of your life each time. And if you can't qualify in one year (for some reason), you'll be stuck with whatever renewal rate your existing lender quotes.

The 5-year variable (insured purchases only)

• Reason: Insured purchases now qualify for rates as low as prime – 1.46%, or 0.99%. That discount is a record. If you want a mortgage with a modest prepayment penalty and maximum upfront savings, this is it.
• Beware: Just be sure to expect one or more rate hikes 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, all amortizations over 25 years, purchases of properties over $1 million, non-owner-occupied rental properties and other mortgages not meeting default-insurance rules).