Interest Rates & Neutral Rates

5 Yr Fixed (insured)	4.84%	↑ 0.10%		3 Yr Fixed (insured)	4.99%	–
5 Yr Fixed	5.09%	–		3 Yr Fixed	5.09%	↓ 0.05%
5 Yr Variable (insured)	6.20%	↑ 0.10%		2 Yr Fixed (insured)	5.69%	–
5 Yr Variable	6.30%	↑ 0.10%		2 Yr Fixed	5.99%	–
4 Yr Fixed (insured)	5.09%	–		1 Yr Fixed (insured)	6.54%	–
4 Yr Fixed	5.09%	–		1 Yr Fixed	6.59%	↓ 0.10%

*As at April 4, 2024

**Please note that these rates are for 25 year amortization. For many of the terms, add 0.10% for 30 years amortization.

Neutral Rates

Historically, the spread between the Bank of Canada (BoC) rate (currently at 5%) and 5 year fixed rates is (on average) 2.35%: if the Bank of Canada rate is 3%, the 5-year fixed rate would be 5.35%. 

However, inflation, quantitative easing/tightening, and the current market cycle is making it such that our 5-year fixed rates are already around 5%, or lower than historic spreads.

What this means is that once we decrease the BoC rate back down to the 2-3% band (to cover inflation), our interest rate would be 4.35% to 5.35%.

Check out the graphs below. One is for a 30 year time horizon of rates and one is the last 10 years. Notice that we’ve had ultra low rates vs historic rates, which all started with the economic meltdown of 2008.

So what are we saying here..? We’re saying that the average 5 year fixed rate, based on historic norms, will be in the mid to high 4% range when this is all said and done.

We’re currently not that far off from this mark already!

MORAL OF THE STORY: Yes, I think variable rates are going to come down 2-3% over the course of the next couple years. But, the fixed rates are almost already where they will end up; maybe another .5%-1.0% decrease…

Notwithstanding, we also have an inverted yield curve, where the 1 year is higher than the 5 year rate; this is not the norm. In the future, 1-4 year rates will be lower than the 5 year, and it may continue to make sense to stick with lower-term mortgages like we are now.

Economic News

At this time, mortgage arrears (people late on their mortgage payments) are ticking up, but we’re still at historic lows. People are just not allowing their mortgages to get into trouble.

The labour market is still strong, with wage growth steady above inflation. However, overall the economy in terms of GDP growth is pretty weak, and this scares many economists.

Households are continuing to experience pains from the increase in interest rates, which affect mortgages, and from rental costs increasing. Consumer spending is on the decline, but savings rates have increased. 

What’s interesting to note is that rate hikes generally have their largest impact, as a general rule of thumb, 6-8 quarters (1.5-2 years) later. We raised rates by 4% in 2022 so it seems like we’re just about to feel the brunt of this most recent monetary policy (rate hikes). 

What’s also interesting to note is that shelter costs (mortgages and rent) make up 30% of inflation. Once the government decreases rates, shelter costs will decrease, prompting the inflation rate to decrease still.

It seems like we’re almost at the beginning of the downward cycle. I’m all game for that!!