The divide between average fixed rates and average floating rates is approaching the largest it's been since August 2011. That was the last time the "spread" between the two was over one percentage point.
Here are the numbers:
Source: RATESDOTCA
Since 2009, the spread between fixed and variable rates has fluctuated between -.28 to 2.08 percentage points. Today, we’re not far off the midpoint of that range (i.e., “normal”).
In 2019, the spread between fixed and variable rates evaporated completely. Five-year fixed rates actually became cheaper than floating rates. This coincided with what economists call an inverted yield curve. At the inverted yield curve's extreme in September 2019, for example, 5-year fixed rates were lower than comparable variable rates by an average of 0.18 percentage points.
That, of course, made fixed-rate mortgages seemingly a "no brainer" for much of the year. Borrowers figured that five full years of “rate security” for less than a variable rate was practically a free lunch. A year later, rates were down another 0.75 to over 1.00 percentage points, thanks to a once in a lifetime (hopefully) global pandemic.
With the fixed-variable spread now back in “normal” territory, will homebuyers alter their decision-making?
Our guess: The percentage of borrowers opting for a variable rate will likely remain in the 16-29% range for now, for various reasons:
The fixed-variable spread will ultimately exceed 1.00 to 1.25 percentage points. That’s when we may see a noticeable shift in variable-rate adoption. With the bond market projecting five rate hikes within 36 months, it may take a big round number (like a 1-percentage-point rate advantage) to convince more than a quarter of Canadians that floating rates are worth the risk.