Canadian households are already setting records for debt levels relative to income and the accompanying risks – mortgage defaults and bankruptcies, for example – will only rise if credit continues to grow.Rafael Ben-Ari/Chameleons Eye/Getty Images/iStockphoto
Welcome to the latest edition of Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister. Read the previous rundown here.
The Bank of Canada is finally starting to signal that inflation risk is a clear and present danger. And if you’re a mortgagor, that means rate risk has risen meaningfully.
The bond market concurs. As of this writing, it’s pricing in no less than five rate hikes in the next 12 months. A few months ago, it was pricing in one.
That kind of drastic shift in rate expectations doesn’t happen often, but when it does, most mortgage shoppers should batten down the hatches and lock in. That is, if they need financing and rate certainty for more than just a few years.
Tip: If you do lock into a fixed rate, choose a lender that makes it likely you’ll pay just a three-months’ interest charge if you break the mortgage early, unless you’re certain you’ll ride your mortgage to maturity. And consider refinancing if your existing lender doesn’t have good rates and the prepayment penalty on your existing mortgage is low enough.
Why the urgency?
Normally the Bank of Canada gets out in front of inflation with pre-emptive rate hikes, given it takes 18 to 24 months for monetary policy to take effect.
This time it hasn’t done that.
This time, it’s a firefighter late to the fire. And when that happens, you need a lot more water to put out the blaze. Read: more rate hikes, faster.
If the central bank acts too late, short-term price pressures can become longer-term price pressures. And that can be disastrous for an economy and for any borrower whose income is not keeping pace with inflation.
And make no mistake, price levels are spiralling. Average core inflation could soon smash a three-decade high. We’ve seen this level of inflation pressure only once in the past 30 years – in 2007-08. The Bank of Canada hiked 250 basis points to get control of inflation back then. The global financial crisis then ensued, which brought rates back down. (There are 100 basis points in a percentage point.)
This time, inflation warning signs are glaring, from supply bottlenecks to the demand-inducing effects of record fiscal spending. The central bank is in a bind. If the market is right, and it’s often not, the bank will need to hike rates in one of its next three rate meetings, culminating in as many as 200 to 250 bps of rate hikes over the next five years.
How to play it
Virtually any rate simulation based on current market expectations shows a four- or five-year fixed easily outperforming a floating rate mortgage, assuming: a) you pay just a three-months’ interest prepayment penalty if you must break early, and b) you pay no more than about one percentage point or so extra for that fixed-rate mortgage, versus the best variable.
In past rate cycles, the Bank of Canada has hiked roughly every three months, on average. This time, if it’s as behind the curve as the market implies, we could see some back-to-back hikes, further tilting the odds in favour of fixed.
A lot of people in this country love their variables and cite, ad nauseam, historical research on the variable-rate advantage. If there’s one thing I’d caution you on, it’s not to get hung up on the past. What happened with rates in the 1980s, 90s and early 2000s bears little resemblance to what’s unfolding today. And Bank of Canada Governor Tiff Macklem’s promise that inflation is “transitory” does not mean that inflation will be short-lived.
Certainly, all of these projections could change given that the inflation picture is fluid. But if you have to book a mortgage rate today, you’ve got to do it on the best information available. And if the family budget is tighter than you’d like, managing rate risk with a low-cost fixed rate is the way to do that.
The accompanying table offers a quick look at the best nationally available mortgage rates as of Wednesday. You’ll find that online rate sites show lower rates in some provinces.
Rates shown in the table are from providers that lend in at least nine provinces and advertise rates on their websites. Insured rates apply to those buying with a down payment of less than 20 per cent, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums.
Robert McLister is an interest rate analyst, mortgage planner and contributing writer for The Globe and Mail. You can follow him on Twitter at @RobMcLister.
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