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Year in Review: Mortgage Rates End the Year 20% Lower

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As we bid farewell to 2019, it'll be remembered as a year when fixed rates defied popular expectations and fell.

On average, 5-year fixed rates were more than 15% lower at the end of the year compared to 2018.

That translated into significant savings for fixed-rate mortgage shoppers:

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For those who qualified for the lowest nationally available 5-year fixed rates, the savings were even more substantial. The lowest uninsured 5-year fixed rate as of Dec. 31, 2018 was 3.44% vs. 2.74% today.

Someone who qualified for that 2.74% rate would be paying $36 less in monthly payments per $100,000 of mortgage. On a $300,000 mortgage, that’s over $108 a month in payment savings…or $9,923 of nominal interest savings over a 60-month term. That’s no small potatoes.

Variable-Rate Holders Not So Lucky

Despite economist and investor expectations for at least one 25-bps rate cut in 2019, variable-rate mortgage holders got a whole lot of nothing.

The Bank of Canada’s overnight target rate, which influences prime rate and floating mortgage rates, ended the year where it began, at 1.75%. Prime rate also remained unchanged, remaining flat at 3.95% throughout the year.

In fact, the lowest insured 5-year variable rates available on Ratespy.com closed the year slightly higher—at 2.69% compared to 2.57% at the end of 2018. That resulted in a $6 per month payment increase per $100,00 of mortgage.

2020: The Year of the Variable Rate?

Considering how reluctant the Bank of Canada has been to cut rates—bucking the trend of 40+ other central banks that have been cutting rates—we’re not holding our breath for imminent rate cuts.

Investors agree. Market forecasts for the Bank of Canada imply flat rates in 2020, with just a 42% chance of a cut by year-end. And as we’ve written previously, the yield curve also supports flatter for longer rate scenario.

Meanwhile, most borrowers gave up on trying to predict rates and took advantage of the negative fixed-variable spread in 2019. In other words, they saw 5-year fixed rates that were as much as 25 bps below floating rates and said, "Why bother with variables?"

At one point during the year more than four out of five borrowers were choosing fixed rates, according to user data from RateSpy.com. And considering the unusually large discounts on fixed rates compared to just one year ago, it's hard to blame them.

We suspect that trend will end by mid-2020, with variable and/or short-term rates regaining some lustre.