The vibe from yesterday’s Bank of Canada announcement was that
rates could stay parked in neutral
for a while.
The market agrees, with traders implying little probability of movement in the overnight rate this year, according to the latest forward rate data from Candeal DNA.
“Overall, the case for further (monetary) easing is weak,” RBC Senior Economist Claire Fan
yesterday, reflecting the sentiment of most of her peers.
That’s all a disappointment to the many who rode the variable-rate coaster lower these past two years, hoping the ride would last longer.
Plenty were betting hard that high rates, a shrinking population and/or Trump swinging trade tariffs like a sledgehammer would crush the Canadian economy way more than reality delivered.
Instead, macro data have beaten predictions and — pandemic aside — OECD
forecast that much of our economy could expand at the fastest pace since 1994.
Sure, a whole chorus of dovish analysts keeps insisting Canada’s economy is fading fast. In fact, many have been crooning the same tune since last spring, yet somehow the patient is still upright and breathing.
Meanwhile, the folks with mortgages aren’t exactly cashing in on this supposed economic slump. Average borrowing costs are almost the same as they were last March, when Trump’s tariff circus caused you-know-what to hit the fan.
Variable popularity increases
The share of borrowers piling into
floating rates
has been growing.
Last year, at least 35 per cent of prime mortgage shoppers signed up for a variable, according to Bank of Canada numbers.
Fast forward to now, and real-time data from Dominion Lending Centres Group — a decent proxy given it’s the nation’s largest mortgage originator — suggests that half of new prime mortgage applications this month were for variable rates.
But if economists are right that rates don’t have much room to fall (barring a shock), should more borrowers give locking-in a longer, harder look?
It’s a fair question, considering the average variable rate over the past year hovered around prime minus 0.75 (equalling 3.70 per cent today). By comparison,
current fixed rates
sit only a quarter-point (25 basis points) higher at
competitive lenders
.
In other words, the price of certainty is cheaper than usual.
Of course, if you somehow knew the Canada–United States–Mexico Agreement was about to unravel and drag the economy into a downturn, or that another recessionary shock was queued up, locking in would make far less sense.
But omniscience is in short supply, and betting on a disaster to pull rates lower is a gamble. In fact, it’s more “gamble” than paying 25 basis points extra for the certainty of a fixed rate.
That’s especially true given the risk now looks decidedly asymmetric. That is, the pain of locking in and missing out on a few more rate cuts is less than the pain of floating and being exposed to many more hikes.
Regardless of all that, crystal balling future rates only gets you so far. Term selection is a multi-faceted decision. To help with that, here are seven reasons to consider locking in, and five reasons not to.
Get a three- to five-year fixed if you…
- Need budgetary certainty because cash flow is tight or income continuity is questionable
- Can get an exceptional fixed rate in the threes (this is easier said than done if you’re already in a variable mortgage)
- Don’t want to worry about mortgage rates again until 2030ish
- Need financing for the entire term (three years, five years, etc.) and won’t pay it off early
- Believe forward rate markets, as fallible as they are, which are pricing in 100 basis points of rate hikes over the next five years
- Can’t easily re-qualify for a mortgage
- Can find a lender with a flexible porting policy (assuming you might move before your term is up)
Choose variable if you…
- Can get an exceptional discount (prime minus 100 basis points or better) and afford the risk of surging interest costs
- Want to play the historical odds that variables typically outperform over full cycles
- Trust governments to restrain spending and control inflation
- Need to avoid harsh fixed-rate early-breakage penalties
- Want to gamble on being able to time a future rate lock (this is the worst reason of all — unless, perhaps, you’re a skilled bond trader who breathes fixed income markets)
Keep in mind,
variable rates
(as opposed to “adjustable rates”) lock in your payment at the start and shield you from some payment risk — unless rates climb so far you’re no longer covering the interest. In that case, most lenders hike your payment to at least cover the interest due.
Of course, if you’re mortgage shopping you don’t need to bet the farm on a single outcome. Hybrid mortgages let you split the difference, with part fixed and part variable. This underrated solution means you don’t have to guess which horse wins.
Whatever you do, don’t pick a floater just to save a quarter point upfront. That’s precisely the move more people make right before rates take off. You might as well pick up pennies in front of a steamroller.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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