Rates are on the Rise!

The Bank of Canada has taken the cap off interest rates and they are set to move up. The question now becomes, how far they will go and should I scrap my variable mortgage for a long term fixed rate?

Well, no one I know has a crystal ball, so it's a question of probability. Given that todays variable is still below 2% and todays five year fixed is in the 5% range, the question becomes, will the BoC raise rates to the point where the variable is equivalent to todays five year rate?

That would be 3% and personally I don't see it happening. Take a look around the planet at the various economies and quite frankly they aren't in good shape. Remember, no other country came through the "recession" as well as we did, so we have a bit of a jaded view of how well (or poorly) world economies are fairing.

The US is still aways from getting back on their feet.

The forecast for the housing market is a cooling trend heading towards a more stable market.

The long and the short of it is, I don't see any reason for a dramatic spike in interest rates, so stay variable. But then again, this is only my opinion. It's your money and everyone's tolerance for risk is different.

Variable Rate vs Fixed Rate Mortgages
As you may know, the BoC sets Canada's overnight target rate. This in turn influences prime rate, which directly affects variable rates.

Fixed rates are a different story. Fixed rates are driven by bond yields (usually, that is-the last few quarters have been atypical). The Bank of Canada has no direct control over bond yields, although it can influence them in certain ways. Fixed residential mortgage rates are determined by changes in the bond market and the competitiveness of the chartered banks in Canada. The Bank of Canada has very little, if any, influence on them.

Unless one spends an inordinate amount of time following the countries financial matters, they aren't going to be aware that bonds are independent from the Bank of Canada rate, but don't dispare, you have lots of company. Here's an example; the entire country might expect the Bank of Canada to cut rates 1/4%, BUT if stronger-than-expected economic reports precede the BoC announcement, bond yields could jump. In that case, fixed mortgage rates could increase while variable rates fall. This has occured on numerous occaissions. (We're not saying that it will happen this time. It's just an example.)

How much do fixed rates really follow the Bank of Canada's lead?

According to the TD Bank, "for every percentage point of central bank easing (for example), the 5-year yield should decline by 70 bps."

CanadianMortgageRates.com recently ran their own tests and found the correlation between prime rate and 5-year bond yields to be 69.5% over the last 10 years. So, a fair amount of the time, bond yields will deviate from prime rate.

That makes sense because 5-year yields are driven by demand for long-term funds while prime rate is linked to demand for short-term funds.

The chart below illustrates how the direction of 5-year yields and prime can differ drastically over 3-6 month timeframes

In sum, bond yields and prime rate (and fixed and variable rates) do move together long-term. But short term, anything can happen.

So, should fixed-rate mortgage shoppers wait until the Bank of Canada's rate announcement before locking in?

There doesn't seem that there is much to be gained by doing so, unless one feels strongly that the Bank of Canada will scare the market with a dire economic forecast...and drive down bond yields.

By waiting, you are simply trying to outguess the market, which is unlikely.

Also, you're disregarding the fact that fixed rates are already at historic lows.

How to get the BEST Long Term (fixed) Rates.
Why bother rolling the dice and taking chances when you can lock in now, get assurance that your rate won't go up, and have the ability to request a downward rate adjustment should your lender drop rates in the next few weeks?

The Bottom Line

Chances are any further BoC reductions aren't going to get you a better rate. In fact, since our rates are so low it is conceivable we could see a rise in rates in the not too distant future.

So, by locking in now you get to have your cake and eat it too.

Got it?...  You're good to go!

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