Fixed- Versus Variable-Rate Mortgages: Is the Reward Worth the Risk?

Monday Morning Interest Rate Update for March 18, 2019

by David Larock

Toronto mortgage ratesCanadian mortgage rates look a lot different today than they did only a few short months ago.

Last October, the Bank of Canada (BoC) had just completed its fifth 0.25% policy-rate increase in a little over a year, and variable-rate mortgage borrowers, who before then had enjoyed more than seven years without a single rate hike, were having their conviction tested.

The BoC had just cautioned that if it was going to keep inflation close to its 2% target, it would need to continue raising its policy rate to its neutral-rate range of between 2.5% and 3.5%. (The neutral range is defined as the policy-rate level that neither stimulates nor restricts economic growth.)

Mainstream economists predicted that sharply higher rates were imminent and argued about whether three or four more rate hikes were likely in 2019. This spooked many variable-rate borrowers, and some of them rushed to lock in a fixed rate before variable rates rose even higher.

Regular readers of this blog might remember that all of this angst got my contrarian itch going. When the BoC raised its policy rate in October, I challenged its rationale, arguing that the Bank’s own forecasts of slowing GDP growth both at home and abroad made it unlikely that inflationary pressures would intensify. Then in November, in a post titled Fixed vs. Variable: Is the Five-Year Fixed-Rate Mortgage Now a No Brainer?, I argued in favour of variable mortgage rates and predicted that “the BoC’s actions will not match its words over the near term”.

Fast forward to today.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

The Case for Lower Canadian Mortgage Rates

Monday Morning Interest Rate Update for March 11, 2019

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) left its policy rate unchanged last Wednesday as expected.

In its brief accompanying statement the Bank acknowledged that our current economic slowdown is now “more pronounced and widespread” than it had previously forecast.

On Thursday, Deputy BoC Governor Lynn Patterson offered more detailed insight into the key factors that are driving the Bank’s increasingly dovish assessment of our economic momentum.

Today’s post provides highlights from both of the BoC’s communications last week and offers my take on the two key questions that matter most to fixed- and variable-rate mortgage borrowers: When will the Bank move its policy rate next? And will its next move be up or down?

Let’s start with a look at the five key factors that led to the BoC’s dovish shift.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Will the Bank of Canada Put Rate-Hike Speculation to Rest?

Monday Morning Interest Rate Update for March 4, 2019

by David Larock

Toronto mortgage ratesIf the Bank of Canada is “decidedly data dependant” as it claims, then it should put an end to speculation about near-term rate hikes when it meets this Wednesday.

Up until now, the Bank has ascribed our slowing economic momentum in the second half of 2018 to falling oil prices and predicted that it would prove transitory. In its most recent Monetary Policy Report (MPR), which I summarized here, the BoC drew a sharp contrast between the economic momentum in our oil-producing and non-oil-producing provinces. But more recent data have blurred that line, and it is now much harder to make the case that the current slow down is just an oil-price story.

The Bank is not expected to change its policy rate, on which our variable mortgage rates are priced, when it meets this Wednesday. The real debate leading up to this meeting is whether the BoC will continue to talk about rates needing to move higher or concede that higher rates are no longer imminent.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Bank of Canada Governor Poloz May Want Higher Rates, But He Needs Stable Inflation

Monday Morning Interest Rate Update for February 25, 2019

by David Larock

You can’t always get what you want
But if you try sometime you find
You get what you need

– The Rolling Stones

Last week Bank of Canada (BoC) Governor Poloz made a speech that reminded me of those lyrics.

Bluntly put, he clearly wants to raise rates but he needs to keep inflation stable.

There are factors beyond Governor Poloz’s control that are preventing him from raising the BoC’s policy rate to a neutral-rate level, which is defined as the level that neither stimulates nor restricts economic growth.

He knows that if he ignores these factors and raises the policy rate too quickly, it will unleash deflationary forces that could push inflation well below the BoC’s 2% target.

If you’re keeping an eye on mortgage rates, Governor Poloz’s speech, titled “The Power – and Limitations – of Policy”,  included valuable insights into where rates may be headed over the short and medium term. I will highlight these and offer my own accompanying commentary in today’s post.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Why the Bond Market Yawned at Canada’s Banner January Employment Headline

Monday Morning Interest Rate Update for February 11, 2019

by David Larock

Toronto mortgage rateasLast Friday, Statistics Canada released our latest employment data, for January, and it showed that our economy added an estimated 66,800 new jobs last month.

Interestingly, even though the headline result came in much higher than the consensus estimate of 8,000, the bond market essentially shrugged off the news. I think that is in part because the underlying data weren’t actually that strong, but also because bond market investors don’t believe that last month’s surprising job-growth headline is likely to move the needle much at the Bank of Canada (BoC).

Before we look at the key details from the latest employment data, let’s first circle back to a recent speech made by Deputy BoC Governor Carolyn Wilkins on January 31, 2019 titled “A Look Under the Hood of Canada’s Job Market”. The speech provides a very recent BoC assessment of the health of our overall job market, and it provides insightful context for evaluating last month’s employment data.

Here are the highlights from Deputy Governor Wilkins’ speech:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

How Canadian Mortgage Rates Are Likely to be Impacted By the U.S. Fed’s Dovish Shift

Monday Morning Interest Rate Update for February 4, 2019

by David Larock

Today’s post focuses on the U.S. Federal Reserve’s key monetary-policy shift last week, but before we get to that, let’s quickly review why the Fed’s actions matter to Canadian mortgage borrowers.

The Bank of Canada (BoC) decided not to raise its policy rate at its January meeting, but reiterated its belief that it would need to continue raising rates to keep inflation near its 2% target going forward. While the Bank emphasized that it would be heavily data dependent and would respond to key  developments both at home and abroad, its decision to hold rates steady sounded like a grudging pause.

The BoC’s desire to bring its policy rate back into a neutral-rate range, where it neither stimulates nor restricts economic growth, makes sense. The Bank understands the potentially destabilizing systemic risks that have built up during the current period of ultra-low interest rates that began at the start of the Great Recession in 2008. Over that period, debt levels have risen to record highs, asset prices have soared, and investors have taken on increased levels of risk in their chase for adequate returns.

The BoC’s biggest challenge in returning its policy rate to its neutral range is that its rate decisions do not exist in a vacuum. It must also be mindful of the impact that outside forces are having on our economy.

This is especially true in the current environment because our economic momentum is no longer being fueled by debt-financed consumer spending, which has (rightly) been reined in by a combination of mortgage rule changes and BoC rate rises. Our policy makers are now hoping that rising export demand will combine with increased business investment to offset a policy-induced slowdown in consumer spending. So far, however, this transition has been slow to develop.

Against that backdrop, last week’s policy statement by the U.S. Federal Reserve was significant.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Update On the Bank of Canada’s Worry List

Monday Morning Interest Rate Update for January 28, 2019

by David Larock

Toronto mortgage ratesWhen the Bank of Canada (BoC) adopted a more dovish tone earlier this month, it explained that it would be “decidedly data dependent” going forward and that it would adjust its policy rate “to developments as they unfold”.

In particular, the Bank highlighted developments in three key areas that would determine “the appropriate pace of rate increases”: Canadian oil prices, Canadian house prices, and global trade policy (which, in banker speak, means the evolution of the U.S. /China trade conflict, the ratification of the new USMCA, and the continuation of U.S. tariffs on our aluminum and steel).

If we’re going to try to read the tea leaves to gauge the timing of the BoC’s next rate hike (and the Bank’s recent language confirmed its steadfast belief that its next move will be a hike), these are the areas to focus on. (It might seem a little early to conduct this exercise, but there has been some movement in key areas, and in an otherwise slow week for news impacting Canadian mortgage rates, now seems like a good time to outline these key determinants.)

In today’s post, we’ll check in on these three key areas.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

All Quiet on the Canadian Mortgage-Rate Front (for Now)

Monday Morning Interest Rate Update for January 21, 2019

by David Larock

Toronto mortgage ratesLast week was a relatively quiet one on the interest-rate front.

Government of Canada bond yields, which our fixed mortgage rates are priced on, edged a little higher, but five-year fixed rates continued to fall among laggard lenders who had not already lowered to match RBC’s recent cut.

Last Friday we received our latest inflation data, and while it showed an uptick in our overall Consumer Price Index (CPI), from 1.7% in November to 2.0% in December, most of that bump was caused by a spike in the cost of airfares and fresh vegetables. That isn’t likely to cause much concern at the Bank of Canada because its three key measures of core inflation, which strip out the inputs that cause short-term volatility in overall CPI, all held steady at 1.9%.

Canada mortgage rates

The Bottom Line: Five-year fixed rates continue to settle in at slightly lower levels and five-year variable rates are holding steady. Hopefully the U.S. federal government shutdown ends soon so the 800,000 affected U.S. workers can receive their back pay and market watchers can get an updated look at how the U.S. economy is faring at what appears to be a critical turning point in the U.S. business cycle.

David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

The Glaring Omission in the Bank of Canada’s Latest Forecast

Monday Morning Interest Rate Update for January 14, 2019

by David Larock

Canada mortgage ratesThe Bank of Canada (BoC) left its overnight rate unchanged last week, as expected, and that means Canadian variable-rate mortgages will remain at their current levels for the time being.

The Bank also released its latest Monetary Policy Report (MPR), which provides a detailed analysis of where it sees both foreign and domestic economic growth and inflation headed over the next two years.

The latest MPR is of particular interest to market watchers because it is the first one issued since the BoC shifted from hawkish to dovish policy-rate language in December (its previous MPR was released last October).

In summary, the Bank expects our current slowdown to continue through the first half of 2019 before our economy resumes its previous growth trajectory. Its latest forecast is based on the assumption that our economic momentum will be supported by “strong employment, expanding foreign demand and accommodative financial conditions”. In my view, there was a glaring omission in the Bank’s analysis, but before I get to that, let’s start with a quick summary of the highlights from the latest MPR.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian Mortgage Rate Forecast (2019): Look Out Below

Monday Morning Interest Rate Update for January 7, 2019

by David Larock

Toronto mortgage ratesA lot can change in a year.

At the start of 2018, forecasters focussed on the theme of synchronized global growth as signs of accelerating economic momentum abounded.

But that momentum did not prove self-reinforcing, as was hoped.

Instead, the stimulative impact from the much ballyhooed U.S. federal government tax cuts was short lived. Chinese economic growth slowed sharply as soon as new debt issuance was curtailed. While the eurozone has showed signs of life, it remains under constant threat, with Brexit and a potential Italian banking crisis now on the front burners. Oil prices have collapsed, and trade wars have cast a pall over everything.

Not surprisingly, forecasters ushered in 2019 with much more bearish projections, and many now predict that the second longest economic expansion in U.S. history will end in the near future. Main Street appears to concur with Wall Street’s less sanguine view – Google searches for the term “recession” are more than three times higher today than they were a year ago.

This has all happened quickly.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Will the U.S. Fed Sooth Nerves or Stay the Course?

Monday Morning Interest Rate Update for December 17, 2018

by David Larock

Toronto mortgage ratesThe U.S. Federal Reserve is widely expected to hike its policy rate by another 0.25% when it meets this Wednesday. The question that is being actively debated is whether it will also adopt more dovish language in its forward guidance (and the answer could impact Canadian mortgage rates).

The consensus expects (and hopes) that it will.

U.S. equity markets have taken a pounding of late (the S&P 500 Index has dropped by 12% since its 2018 peak on September 21). A growing number of market watchers are forecasting slowing U.S. economic momentum in 2019, and recession fears are rising. Those fears are evident in the spread between 2-year and 10-year U.S. treasury rates, which has now narrowed to almost zero. If that spread goes negative, history says that a U.S. recession will more than likely follow (see chart).

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Canadian Mortgage Rates Aren’t Headed Higher After All

Monday Morning Interest Rate Update for December 10, 2018

by David Larock

Canada mortgage ratesJust like that, all of the dire warnings about rapidly rising Canadian mortgage rates disappeared faster than cookies and carrots on Christmas Eve.

To recap, when the Bank of Canada (BoC) met in October, it raised its policy rate by another 0.25% and declared that our economy was operating at its full capacity. The Bank warned that it would need to increase rates by another .75% to 1.75% in order to keep inflation near its 2% target, and it removed the reassurance that it would apply “a gradual approach” to additional hikes from its policy statement.

Not surprisingly, the consensus warned that mortgage rates were about to move materially higher.

I was more sceptical. In the post I wrote at that time, I argued that if the BoC was really going to be “guided by the incoming data”, then it seemed unlikely that a steady string of additional policy-rate rises was just around the corner. Our economic data were mixed at best and, since then, inflation has further moderated, oil prices have collapsed, average wage growth has continued to fall, and our GDP growth has slowed. (At the same time, trade tensions and instability risks beyond our borders have also intensified.)

Nobody said that the BoC’s job was easy, especially today.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Will the Bank of Canada Pivot This Week? (Hint: It Should)

Monday Morning Interest Rate Update for December 3, 2018

by David Larock

Toronto Mortgage RatesA lot can change in six weeks.

On October 24 the Bank of Canada (BoC) hiked its overnight rate by another 0.25% and warned that additional increases were likely.

BoC Governor Poloz assessed that our policy rate of 1.75% remained “stimulative” and that it would need to rise to between 2.5% and 3.5% in order to keep inflation close to the Bank’s 2.0% target. Both he and BoC Deputy Governor Wilkins sounded upbeat about our economic momentum, and they expressed confidence in our economy’s ability to handle additional rate hikes.

Variable-rate mortgage borrowers grew increasingly nervous. Who could blame them?

After seven years without a single rate increase, they had just seen their fifth quarter-point hike in the last seventeen months, and the person with his hand on our policy-rate lever was warning that there were more to come.

I had my doubts, which I first outlined in this post asking “How Much Higher Will Canadian Mortgage Rates Go?”. In it, I outlined recent Canadian and U.S. economic data that showed signs of slowing momentum and highlighted the BoC’s own forecasts, which projected reduced economic growth rates for the global economy, the U.S., China and Canada over the next three years.

Then oil prices went from falling to free-falling. Worse still, the price gap between a barrel of Western Canadian Select (WCS) and a barrel of West Texas Intermediate (WTI) continued to widen, reaching a staggering 50 USD (a record), and that exacerbated the impact of the oil-price collapse on the Alberta oil patch.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Will Last Month’s Inflation Rise Lead to Higher Canadian Mortgage Rates?

Monday Morning Interest Rate Update for November 26, 2018

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) is caught between a rock (rising inflationary pressures) and a hard place (waning economic momentum).

On the one hand, the Bank may believe that it needs to raise its policy rate pre-emptively to stay out in front of rising inflationary pressures, but on the other hand, if our economic momentum has already begun to slow naturally, incremental rate hikes risk doing more harm than good.

Last week BoC Deputy Governor Carolyn Wilkins gave a speech about how the Bank’s monetary policy framework is evolving. In the Q & A session afterward she commented that the BoC may end up being a victim of its own success because if its policy-rate rises keep inflationary pressures contained, observers might say that the Bank’s monetary-policy tightening was unnecessary.

What she didn’t say is that in such a circumstance, because some of our economic momentum will need to be sacrificed at the altar of price stability, criticism may still be warranted. After all, over-tightening monetary policy also controls inflation, but at too high a cost.

I see that as the BoC’s biggest risk in the current environment.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.

Fixed vs. Variable: Is the Five-Year Fixed-Rate Mortgage Now a No Brainer?

Monday Morning Interest Rate Update for November 19, 2018

by David Larock

Toronto mortgage ratesToday’s post returns to the question that every borrower I work with loves to ask: “Should I choose a five-year fixed- or variable-rate mortgage today?”

Most market watchers now argue that fixed is the way to go in the current environment.

That view is based in large part on the latest policy-rate statement from the Bank of Canada (BoC), wherein it assessed that “the policy interest rate will need to rise to a neutral stance to achieve the inflation target”.

In plain English, the Bank essentially said that it expects it will need to raise our current policy rate of 1.75% into a neutral-rate range of between 2.5% and 3.5% in order to keep inflation at or very near 2%. (As a reminder, the neutral rate is defined as the BoC’s policy-rate level that neither stimulates nor restrains our economic growth.)

Variable mortgage rates are priced on the policy-rate, so if the Bank hikes by another 1% to 2%, our variable rates will increase by the same amount.

Given that five-year variable rates are only about 0.5% lower than their fixed-rate equivalents in the current environment, it might seem like a no brainer to choose fixed. But at times like this, the contrarian in me remembers the famous quote from legendary investor Bob Farrell who said: “When all the experts and forecasts agree — something else is going to happen”.

With that in mind, here is why the five-year variable rate may still be worth a look in the current environment.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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