Variable rates are falling! – Fixed rates are rising? (read on)
What’s Happening Now (March 15, 2020)
Bottom Line… Eitan’s Suggestion: If you’re getting a fixed rate of 2.64% or lower, you’re doing pretty well vs the variable.
Quick Math: The graph below shows a $500,000 mortgage and the difference between a fixed rate of 2.64% versus a variable rate of 2.00%. The variable rate is lower at this time but the rate increases by 0.50% in year 2 and 3 respectively. The math shows that at the end of 5 years, you would be worse off (by $1,018) if you picked variable.
Variable Rates Right Now!
The Bank Of Canada made an unexpected “emergency” rate cut on Friday. This rate cut moved the Central Bank’s prime rate down from 1.25% to 0.75%.
This cut followed the previous week’s rate cut from 1.75% to 1.25%.
It is likely that more rate cuts are in the works.
If you have a variable rate mortgage, you will likely see a 1% decrease from two weeks ago. Please see below: How Variable Rates Work.
After the new rate cut, variable rates are in the 2.00% to 2.35% range. It’s important to note that these current rates may only be temporary. In most cases, I am still advising clients to go fixed!
If you DO have a variable rate mortgage, assume that your next payment (if not with TD and RBC’s static payment variable rate mortgage) will decrease.
Fixed Rates Right Now!
Since January and amidst COVID-19’s uncertainty, fixed rates steadily decreased. However, since the end of February, and when North America seemed like they were not immune to the virus, we’ve seen larger decreases in the fixed rate.
On March 12 and 13, fixed rates increased quite a bit. Wait, what?!
On March 12th, The United States and Canada both announced massive stimulus plans. The stimulus measures, and even a declaration of a national emergency, are meant to counter any market dysfunction in the face of the spreading pandemic.
Fixed rates were going down due to the extensive market uncertainty. Basically, the market didn’t know how bad things were going to get… But, ever since the stimulus plans and emergency declaration, longer-term bonds have increased. In a nutshell, people thought the sky was falling. Now, we know it’s falling but the market thinks they also know how far the sky will fall and when it will stop.
How Fixed Rates Work
Fixed rates are not as cut and dry as variable rates are (below). They are generally tied to the economy, future economic outlook, and the bond market.
As money moves out of more risky investments (read: the stock market & commodities) and into cash, bonds, and gold, bond yields (interest rates) fall.
Boiling it all down.., as the economy does well, money moves out of safer assets into higher risk, but higher return investments. When this happens, the bond market becomes less desirable for investors, and the government and institutions have to increase their rates to spur investment in these assets (bonds).
The flip side happens when the market is not doing as well… investors flock to safe bonds and the yields come down.
This happened twice over the past 6 months. The first time was during the height of the US/China trade war in August and September, and the second is today’s coronavirus scare. In both cases, the bond market decreased drastically. But, with the first case, we saw an increase back to more normal rates with a relaxing of trade tensions.
How Variable Rates Work
Variable rates are directly related to the Bank Of Canada changing their “overnight rate.”
Canadian banks use this rate as a benchmark for their own “prime rate,” and charge borrowers above or below their prime rate.
As of a few days ago, the bank Prime rate was 3.45%. And, if you have a rate of Prime – 0.75%, that means your current variable is 2.70%.
Since the overnight rate decreased, it’s probable the banks will match that decrease and lower their own prime by 0.50%. But, there’s precedent for Canadian banks to decrease their prime LESS than the overnight rate.
In January 2015, The BoC decreased from 1% to 0.75%, whereas banks decreased from 3% to 2.85%. This happened again in July of that year when the overnight rate decreased another .25% and the banks only decreased their rate by 0.15%.
So, it’s possible that bank prime rates will only decrease by .30%, rather than a full 0.50%.
Please don’t hesitate to contact me or Adam
to discuss your mortgage or your mortgage needs.
Here to help in this strange time.