Welcome to the 4th edition of our Mortgage Newsletter for 2024!
As the days grow longer, June offers a chance to stretch our wings and explore new horizons. Whether it's a long-awaited adventure or a personal goal, let this month be your launchpad for something exciting!
This morning, the Bank of Canada (BoC) made a significant announcement. The much anticipated rate cut has finally arrived with BoC announcing a reduction in its Policy Rate by 0.25% (from 5% to 4.75%). This marks the beginning of a downward trend from a multi-decade high, bringing the Bank/Lender Prime Rate to 6.95%. For those with variable rate mortgages or loans, this translates to a reduction in monthly interest costs of about $20.83 for each $100,000 of debt. However, if you are in the market for a new home or to refinance an existing mortgage, there will be little to no improvement on your eligibility to secure a higher mortgage amount.
You can access the complete press release by the Bank of Canada [here].
Economic Update:
Since our last update on April 10th, 2024, there have been notable developments in Canada's economic landscape:
Consumer Price Index (CPI): The CPI has been trending down with a month-over-month increase of 0.60% in March and 0.50% in April. The annualized reading was 2.70% in April, well within the BoC’s target range.
Unemployment: The unemployment rate has risen, with figures at 5.80% in February, and 6.10% in both March and April 2024.
Given this softer economic data, economists forecast a potential 0.75% reduction in the Policy Rate (and thereby Prime Rate) for 2024. However, stronger-than-expected economic figures in the US may limit the speed of these reductions.
Key Market Insights:
Bond Yield and Fixed Rate Spread: The spread between bond yields and fixed rates is higher than usual, suggesting that lenders could lower rates even if bond yields don't decrease.
Fixed vs. Variable Rates: Variable Rate mortgages are currently much higher than Fixed Rate mortgages, but we can expect the gap to reduce in next 12 to 18 months.
Variable Rate Discount: Variable rates are priced at a "discount" to the Prime Rate, but these discounts are currently lower than the long-term average. We can expect the discounts to increase in the next 12 to 18 months as demand for these products increase.
Betting on Prime Rate: Borrowers opting for new variable rate mortgages or choosing to remain with a variable rate mortgage are betting on a decrease in the Prime Rate by at least 1.25% within the next 12 months, or 1.50% within 18 months in order to come out ahead of 3-year Fixed options.
Mortgage Strategies:
3-year Fixed Rate Mortgage offers immediate relief from higher payments for those currently in a Variable Rate Mortgage.
3-year Fixed Rate mortgage allows borrowers renewing their mortgage to avoid significant payment increases associated with Variable Rate options. It also provides the flexibility to renew sooner, potentially securing a lower rate compared to committing to a longer 5-year Fixed term.
Those with the flexibility in monthly budget may choose a Variable Rate mortgage as it would likely be more cost-effective over the next 3 years (in case Prime Rate drops by 2% over the next 24 months).
For detailed insights, keep reading...
Mortgage Interest Rates
Presently, the 5-year bond yield stands at 3.534%, nearly 20 bps lower than the closing 3.726% reported in our last communication on April 10th, 2024. Yields remained within a very narrow range for last couple of months as it tries to decipher the speed and extent of rate cuts, and the contrast between economic figures on either side of the border is not making it any easier.
To offer you a visual insight into evolving trends, we've included charts below. These charts illuminate the trends of various aspects associated with mortgages with a 5-year term, be it Fixed or Variable.
Note: The rates indicated below are the most commonly available rates for Prime borrowers. Many Qualified borrowers secure a lower interest rate than depicted below due to superior credentials. Interest rates with B-lenders and Private mortgages are at a premium to these levels.
The charts above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 33 months or so. For the shorter term (1-3 year) Fixed rate mortgages, the rates continue to be at a premium to corresponding 5-year rates.
Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but currently we are in a phase where the relationship is inverse. This typically happens when the interest rate trend is under reversal. There is no guideline as to how long such an inverse relationship can persist but in "normal" times this period is limited to couple of months at best. This inversion has persisted for about 19 months now.
Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate). This spread has been larger than usual for the 24 months or so, but we seem headed back to the average which is around 0.75% to 1.50% depending on the kind of mortgage.
A higher discount on the chart generally signifies a heightened demand for Variable Rate mortgages. It reflects the dynamic interplay between borrower preferences and the response of lenders to this demand. Conversely, a lower discount may indicate a market shift towards Fixed Rate products.
Note: If you need help with your financing options, are interested in working with me or want to learn more about my services, please don't hesitate to get in touch. I'd be happy to chat!
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