Last week was relatively quiet for mortgage-related news.
On the Canadian front, the most noteworthy update came from a speech by Bank of Canada (BoC) Deputy Governor Rhys Mendes. He cautioned that bond-market investors “place more emphasis on the preferred core [inflation] measures than we do”.
That difference is significant because our core measures are hovering at around 3%, whereas Mendes said that the Bank currently estimates our inflation to be “in the vicinity of 2.5%”.
Inflation at that level is much closer to the Bank’s 2% target, and that increases its flexibility to continue cutting its policy rate if our economy weakens further.
In the US, non-farm employment data were due on Friday. But the failure of the US Congress to pass funding legislation forced a shutdown of the US federal government last Wednesday. There will be no new economic data released by federal agencies until the government re-opens.
US treasury yields haven’t moved much in response thus far, but a lack of real-time data will likely increase volatility as investors try to triangulate the US economy’s trajectory with only piecemeal information.
Fixed Rates
Government of Canada bond yields were range bound last week, and fixed mortgage rates held steady.
Variable Rates
Variable-rate discounts were also unchanged.
Bond-market investors currently put the odds of a Bank of Canada (BoC) rate cut at its next meeting on October 29 at approximately 20%. Regardless, I continue to expect more rate cuts ahead.
The Bank’s policy rate now stands at 2.50%, and it will not be helping to stimulate demand until it is 2% (or less). The BoC has reduced it to 2% or less during all five of its most recent rate-cut cycles. I expect that it will do the same this time.
Insider’s Tip for Borrowers
If you’re in the market for a mortgage, instead of focusing on how much you can borrow, you will be far better off in the long run by focusing on how much you can (conservatively) afford to pay.
A lender doesn’t care if you ever save for retirement, take a vacation, or go out for nice dinner. So, when you decide how much you will borrow, focus on what works for your budget, not on the maximum amount you can borrow.
This post offers advice on how to work out a reasonable mortgage budget using two different approaches: the easy way and the hard way.
My Take on Today’s Most Popular Mortgage Options
My assessment has been the same for a while now.
Fixed rates are offered at about their long-term average levels.
Right now, the best available three- and five-year fixed rates are both good options. If these rates remain roughly equal, I think five-year fixed-rate terms offer slightly better value.
I continue to believe that today’s variable mortgage rates will likely produce the lowest borrowing cost over their full term. I expect the BoC to enact more rate cuts over the relatively near term.
Anyone choosing a variable rate should do so only if they can live with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs (and in some cases, higher payments) should my forecast prove incorrect.
Three Posts Every New Visitor to My Blog Should Read
1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages.
2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties
This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender. A lower penalty can save borrowers thousands of dollars if rates drop.
3. What’s in the Fine Print
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract.
David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.