As of 10 a.m. on March 8th, 2023, Bank of Canada announced its decision to keep the Overnight Rate (aka Policy Rate) unchanged at its second meeting for 2023. So, in effect Policy rate remains at 4.5% and as a result Bank / Lender Prime Rate should remain unchanged at 6.70%. You can find the entire press release by Bank of Canada here.
Good news for those of you with a variable rate mortgage/ borrowing is that after 9 increments in the last one year, you get a reprieve from the steady increases in your monthly payment. Your interest rate remains unchanged till Bank of Canada revisits this decision on 12th April 2023 and hopefully, we continue to witness softening in economic data which in turn will allow BoC to hold its rate unchanged for the next little while.
Since the last update on 25th January 2023, the spread between fixed-rate and variable-rate mortgages has narrowed as fixed rates have increased recently. However, fixed rates are still lower than corresponding variable rate mortgages. This inversion (Fixed Rate being lower than Variable rate) has persisted for about 15 weeks now. In a normal rate cycle, such an inversion doesn’t persist for more than a few months, but nothing seems "normal" these days!
Check the graph below for a long-term comparison between Fixed & Variable Rates.
Mortgage Interest Rates
As you know the 5-year Fixed-rate mortgages in Canada follow the 5-year bond yields and right now those bond yields are at 3.612% (much higher than 2.971% witnessed on 24th January 2023). Since my last update, the yields saw a high of 3.717% on 23rd Feb on account of the stronger than expected employment figures reported for January 2023. As things stand today, yields are much closer to their peak of 3.896% (seen on 20th Oct 2022) and appear to be looking for direction from economic data to be released in coming days. This change in direction has had an impact on Fixed Rate mortgages and corresponding Insured and Insurable mortgages have witnessed an increase of about 30 bps since the last update.
Checkout the charts below to get an insight into the various trends playing out for mortgages with a 5-year term (Fixed and Variable).
The chart above shows the trend in interest rate for the major types of mortgage products (Fixed and Variable) for the last 18 months or so. For the shorter term (1-3 year) mortgages, the rates are 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.
When somebody secures a Variable Rate mortgage, the only aspect that is held constant is the discount to Prime Rate (and fixed payments in some instances) that they enjoy. However, the actual interest rate and interest costs change as Prime Rate changes. The above chart depicts the trend with pricing or discount that lenders are offering on such variable rate products. A higher discount generally depicts a higher demand for variable rate mortgage and how the competition between lenders is responding to corresponding demand and vice-versa.
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