Call him Stranger Things real estate market: Canadians can now get a lower interest rate on a new mortgage by blocking a fixed rate, rather than opting for a variable rate.
Here's how things usually work.
"People are used to paying extra for" insurance "at a fixed rate of five years," said Robert McLister, a Toronto mortgage broker and founder of RateSpy, via e-mail.
But that price premium is no longer there. For example, the lowest five-year fixed rate available nationally for a conventional mortgage is 2.69 percent, according to the RateSpy.com rate comparison site. By comparison, the lowest equivalent variable rate is 2.84 percent.
When it comes to funding available to qualified borrowers, five-year fixed rates have not been as cheap as floating rates in recent decades. The last time the mortgage market realized something similar it was right before the recession of the 90's, according to historical data compiled by McLister.
"We are in a rare territory," he wrote in a recent blog post.
Here's what to do.
WATCH: should you get a fixed or variable mortgage rate?
Investors are worried about a slowdown in the economy and perhaps a recession
What is happening in the mortgage market has a lot to do with the bond market, where investors are currently performing better on short-term than long-term debt.
An obligation is a type of investment that represents a loan granted by an investor to a company or governmental entity for a specific period of time. Normally, the loan of money over a longer time horizon produces higher returns, a reward for creditors willing to take the greater risk of being separated from their money longer. But longer-term bond yields can fall below those on short-term debt when investors believe the economy will slow down – or even plunge into recession – and interest rates are also headed south . The result is what economists call an inverted yield curve.
WATCH: Pros and cons of a 30-year mortgage
This has been, until recently, the situation in the United States, where traders are worried that the economy will hit the brakes. The yield curve has now become significantly stronger as the US central bank, the Federal Reserve, should largely cut interest rates on July 31, which the market hopes to keep the economy running.
In Canada, however, the yield curve is still reversed. This is not necessarily a sign of bad things to come. Rather, it probably reflects a combination of domestic and external influences.
On the one hand, lower yields on long-term debt in the United States and other markets put downward pressure on Canadian long-term bonds.
"To date, Canada has imported about 70% of moves into global markets," said Ian Pollick, head of North American pricing strategy at CIBC Global Markets.
On the other hand, our central bank, the Bank of Canada (BoC), has not yet hinted at wanting to cut rates, given that our economy has come to a good end, Pollick said.
And while a reversed yield curve has often predicted a cooler growth period, it is a much less reliable predictor of real recessions in Canada than the United States, said Doug Porter, chief economist of the BMO Financial Group.
For his part, BoC governor Stephen Poloz recently said he believes the current reversal of Canada's yield curve is an "innocent reversal" which is "more statistical than indicative of a recession".
WATCH: how the change in interest rates affects borrowers and savers
What enters this with the mortgage market?
The yield on five-year bonds of the Government of Canada is a key parameter for a five-year fixed rate mortgage. And since the yield on five-year government bonds has declined, so has the interest rate on five-year fixed-rate mortgages.
On the other hand, the main influence on variable rate mortgages is the key interest rate of the BoC, which influences short-term rates and has not moved since October 2018.
This won't last forever, though. Pollick expects the BoC to cut interest rates next spring, as the lowest rates in the United States put upward pressure on the loonie, which will be a brake on Canada's economic growth.
Bond markets tend to adjust to the first expected cut in the interest rate about six months before it actually happens, so if the BoC were to cut rates in March or April, you would see the yield curve begin to worsen towards October, Pollick said .
Porter, however, does not soon see the Canadian central bank's mobile rates. BMO forecasts are for constant rates throughout 2020.
The implication for the mortgage market is that "we could be in this very unusual situation for a while," he said.
WATCH: Is the new buyer incentive for the first time at home a good deal?
What are the implications for Canadian mortgage holders?
If you're on the market for a new mortgage, a five-year fixed-rate mortgage at 2.69 percent or less "it's hard to say no," McLister said.
If you can take a certain risk, you may want to shoot at an even lower rate, like the fixed 2.49% rate that is currently available on mortgages for a duration of two years.
If you currently have a variable rate mortgage you may be able to lock in a lower fixed rate. In a recent blog post, McLister claimed to have spoken to a couple with a variable rate of 3.4 percent, whose bank offers a fixed rate of 2.92 percent. This would translate into nearly $ 4,200 in savings on a $ 400,000 mortgage, according to McLister.
READ MORE: 3 tips that could save you thousands on your mortgage
If you decide to switch to a fixed rate, you should still try to negotiate with their bank, McLister said. One way to do this is to print a list of the best mortgage rates you may be entitled to with other lenders. You should also keep in mind that your bank may wish to register you for a term longer than the remaining term on the current mortgage. Finally, you should be aware that breaking your mortgage usually involves higher penalties when you have a fixed rate mortgage, which could make the lock-in less attractive if it is a change that you will have to move or refinance first. of the end of your new determined time.
As for the subscription of a new variable rate mortgage, McLister is cautious in choosing this option in the hope that the loan costs will decrease if a CdC cuts next year. Even if the central bank lowers the reference rate next year, according to McLister there is no guarantee that lenders will pass 100% of these savings to borrowers.
"Banks can become stingy to protect their profits in low or falling environments," he said.
© 2019 Global News, a division of Corus Entertainment Inc.
. (tagsToTranslate) mortgage rates (t) Bank of Canada (t) Bank of Canada rate cut (t) best mortgage rate (t) bond yields (t) Fed rate cut (t) Fed rate rate 31 July (t) Federal Reserve ( t) Fixed mortgage vs. floating rate (t) Inverse yield curve (t) Mortgage rates and bond yields (t) Stephen Poloz (t) Canada (t) Economy (t) Money (t) News