During the holidays we seem to have (finally) won… real estate.
And now that our attention is on the choice, price of pencils and the fourth dose of vaccine, the mortgage market could be the scene of a rather rare phenomenon, somewhat comparable to the passage of a comet on the evening of a total lunar eclipse.
What message does this amazing situation send us?
A rare phenomenon
Quit the suspense: There’s talk of the possibility that mortgage seekers will come across offers where the variable interest rate is higher than that of a five-year fixed-rate loan.
Mortgage broker Hugo Leroux probably wouldn’t bet his house on it, but he thinks the scenario seems more plausible than ever.
“It could be in two to three months,” says the industry veteran.
What is it based on?
The “variable” could rise again…
The spread between fixed and floating rates has narrowed at a surprisingly rapid pace since the beginning of the summer, particularly as a result of the Bank of Canada’s 1 percentage point interest rate hike in July, which impacted floating rates. Further increases are expected by the end of October.
Also, lenders make less attractive offers to customers who are attracted to the “variable”.
“At the end of last year, the banks offered their key interest rate minus 1.1%. Today it’s prime, down 0.4%,” explains the Hypotheca broker.
The landline is going under
At the same time, the five-year fixed rate stopped rising. Better it started going down slightly.
The terms of this type of loan are determined by the Canadian bonds. At the start of the summer, five-year bond yields peaked at 3.60% in mid-June. Two months later, they fell back to 2.74%. [Pour plus de détails, lire ma chronique « Les taux hypothécaires fixes explosent »]
However, lenders are slower to pass on declines to their customers and quicker to pass increases to them when bond yields soar.
Dimitri Rougas points out that the traditional banks have hardly moved to this side.
“We’re beginning to see some lenders offering discounted rates on insured five-year fixed-rate mortgages,” observes Planiprêt’s mortgage broker.
Nevertheless, it is enough if an important player gets the ball rolling for the others to follow suit. If that happens by the fall, variable rate and fixed rate could overlap there.
For example, the first could reach 4.50% and the second 4.25% (at 3.75% and 4.50% respectively this week in the best conditions).
Should the interest rate be fixed?
Such a situation brings us back to the eternal question: fixed or variable?
And for adjustable rate mortgage holders, should they include this?
For the first question, remember that after five years, the floating rate has proven to be more beneficial almost nine times out of ten in the past. Even with a delay at the start, he can win at the finish. All that is needed is for the Bank of Canada to cut interest rates somewhat by 2027, which is a very likely scenario.
The two brokers don’t think much of the idea of fixing the interest on a variable loan.
Someone with three years left on their contract will convert their adjustable-rate mortgage into a three-year fixed-rate loan. Interest rates on this type of loan are currently higher than on five-year contracts.
To summarize: less favorable floating rates, fixed rates that aren’t going down as they should… Lenders don’t give gifts.
“Anyone looking to get a loan in the fall would consider a one-year fixed-rate mortgage until things get better,” suggests Hugo Leroux.
Update on the federal decision
Last August 3, I told you about the concerns of auditors about the federal plan to remove paper assessments from taxpayers who file their income tax returns electronically. Less than a week later, Canada’s Treasury Department offered to back down. It’s not set in stone yet, but individuals will likely need to provide consent to receive the electronic notification. Also, the change will be pushed back to 2024. Don’t thank me 😉