Mortgage Report

November 2020 Summary

Mortgage rates are likely near their bottom for this economic cycle, for three reasons:

1) The Bank of Canada stated its aversion to negative interest rates repeatedly, declaring rates are already at the “effective lower bound”

2) Economists project higher inflation and bond yields in 2021

3) BoC bond buying is expected to reduce fixed mortgage rates only 0.05 percentage points more from here.

While rates are likely sideways-bound for many months (maybe a few years), the unlikelihood of further prime rate reductions suggests that fixed rates may have a better risk/reward profile than variable rates.

The BoC’s own forecasts, as well as the economist consensus, now project no rate increases until at least 2023 (2+ years). Keep an eye on the 5-year bond yield, however, as a move above 0.60% could indicate a change in rate trend from sideways to up.

Value zone

Rates with exceptional value this month include:

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

• Reason: 5-year fixed rates are priced just a hair above variables and offer far more protection if rising inflation expectations and/or credit risk concerns lead investors to sell bonds, thereby driving up interest rates. This term eliminates all renewal risk until 2025. The best 5-year mortgages have fair penalties and can be extended with no penalty—helpful if the borrower later decides to lock in even longer.

The 1-year fixed (insured & insurable)

• Reason: At prime – 0.70% on average, variable-rate discounts are just so-so, historically speaking. A better alternative for well-qualified risk tolerant borrowers with above-average mortgage amounts is the 1-year fixed. You can find them as low as 1.24% for insured mortgages or insurable mortgages with 35%+ equity.

The 5-year variable (insured only)

• Reason: Insured purchases now qualify for prime – 1.03% nationwide through brokers (and even lower in Ontario). If you absolutely must float your mortgage rate, you could do a lot worse. Just be prepared for higher fixed rates in 2021 or 2022, assuming you hope to lock in at some point.

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).