Shovelling and Shopping

Last week was a slow one for news relating to Canadian mortgage rates, which was a welcome respite for those who were busy with shovelling and shopping.

Government of Canada (GoC) five-year bond yields were two basis points higher last week, closing at 1.81% on Friday. Market five-year fixed rates are available in the 3.35% range and there are lower rates available to strong borrowers who have deals closing within the next 30 days and in some cases, with mortgage contracts that come with more limited terms and conditions. As usual, it pays to do your homework.

Variable rates are currently offered in the prime minus 0.55% range, which works out to 2.45% using today’s prime rate of 3.00%. The Bank of Canada recently softened its view on when it may raise its overnight rate, on which our variable rates are based, and investors are now pricing in the possibility of a rate cut in the BoC’s future. While that seems unlikely in the current environment, my recent fixed- versus variable-rate simulation shows that there are significant potential savings inherent in today’s variable rates, rate cut or not.

The Bottom Line: There has been increased speculation that the U.S. Fed may taper its quantitative easing (QE) programs in the near future. If this happens, and I’m still not convinced that it will, I think the Fed will try to aggressively counteract any sharp rise in bond yields that follows. Given the 90%+ correlation between U.S. and Canadian bond yields over the last several years, that should keep  our fixed-mortgage rates relatively unchanged  well in to the new year, and our variable rates at today’s ultra-low levels for much longer than that.