Dave Larock in Interest Rate Update, Mortgages and Finances
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Canadian mortgage rates moved higher again last week but it wasn’t because of new economic data or rising bond yields. Instead, one large lender raised rates and everyone followed, repeating a cycle that we have seen several times lately. Over the past couple of months these rounds of follow-the-leader rate changes have shrunk average five-year variable-rate discounts from prime minus 0.60% to prime minus 0.40% and increased average five-year fixed rates from 2.59% to 2.79%.
Market-wide rate changes like these are difficult to predict because they start out as subjective decisions made by one lender that everyone else then decides to follow, and in many cases, the followers have different reasons for raising than the leaders did.
Here are my thoughts on the factors that have led to these recent mortgage-rate increases:
Lenders shrank their five-year variable rate discounts in early October when Banker’s Acceptance rates started to rise in the face of higher perceived credit risk (which you can read about in detail in this article written by Rob McClister). This timing worked out well because our regulators get nervous when borrowers start piling into variable rates, and we would likely have seen just that if five-year fixed rates rose while variable rates remained unchanged. The order of these rate increases ensured that changes in the fixed/variable spread did not skew demand in favour of variable rates, therby avoiding the ire of our new federal finance minister, who is still assessing current conditions.
These market-wide rate increases have been led by the major banks with both Scotiabank and TD taking turns leading the market higher. The banks typically announce a rate change and then wait to see if the market matches, but they don’t always. For example, when the Bank of Canada (BoC) announced its latest overnight rate cut of 0.25% in July, TD quickly dropped its prime rate by 0.10%, hoping that other lenders would follow its lead. Shortly thereafter, another major bank dropped by 0.15% and once other lenders started matching the 0.15% rate drop, TD quickly moved its prime-rate discount by another five basis points and fell back into line.
In fact, TD has tried to lead fixed-rate pricing higher on several occasions this year and until recently, these increases were met with market indifference. That’s why it’s hard to predict how other lenders will react when a large lender raises rates - without being a fly on the wall at each of their management meetings. It’s like watching a sand pile form and trying to predict which grain of sand will trigger a landslide when most cause barely a ripple.
Five-year Government of Canada (GoC) bond yields fell by one basis point last week, closing at 0.94% on Friday. Five-year fixed-mortgage rates are available in the 2.54% to 2.69% range and five-year pre-approval rates are offered at 2.79%.
Five-year variable-rates are available in in the prime minus 0.50% to prime minus 0.40% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.
The Bottom Line: Mortgage rates moved higher again last week, but not because of GoC bond-yield movements or market reactions to new economic data. Instead, these rate rises were triggered by the culmination of the different factors listed above, and this is an important distinction because rate increases that are triggered by these circumstances are not normally a signal of the start of a broader uptrend.
David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave