by the Green Mortgage Team

THIS MONTH’S RATE UPDATES

Fixed Rates

DROPPING

INCREASING After an up and down year for rates throughout 2020, the past few months have shown a flattening in the curve. There is little movement expected in fixed rates for the next two years or so. Bonds have hovered around 0.4% for the past five months. A normal spread is 1.5%-1.8% above bonds. With insured mortgages available close to 1.5% and conventional mortgages just under 2%, we are not expecting much to change unless bond yields move (this is also unlikely with the government tightly controlling their purchasing of a significant number of bonds in the market right now). It is very important to understand how fixed rate penalties have increased due to the drop in rates. The penalty calculation is based on the difference between your rate and the current market rates. Since that spread has increased, so too will your mortgage penalty. We have been running scenarios on mortgage penalties and the cost of most penalties is between 500%-600% (in some cases 1,000%) more expensive than the 3-month interest penalty of taking a variable rate. As an example, a $500,000 mortgage may have a penalty of $19,350 instead of a 3-month interest penalty of approximately $2,487. One way to mitigate this risk is to go with a “non-bank” lender who has a much fairer calculation for their mortgage penalties. You can read more about the calculation of mortgage penalties here.

Due to the potential Interest Rate Differential (i.e. IRD) penalties that may apply, we are warning our clients that if you take a long-term fixed rate mortgage, you need to be very sure that you will not be breaking your mortgage before the term is up.

As a result of these IRD penalties, we are advising a large number of our clients to choose a variable right

right now.

Variable Rates

Similar to fixed rates, variable rates have not seen significant movement since they bounced around in the early and middle parts of 2020. When COVID-19 hit in March, the Bank of Canada made immediate changes and dropped rates 1.5% over three different drops. This is the biggest change we have seen over such a short period of time since the subprime crisis in 2008. The US government is signalling that there is a high likelihood that they will maintain these low rates through 2023 or even 2024. This means that anyone in a variable rate right now should be able to enjoy their low rate for about two or three years. It is unlikely that the Bank of Canada will make any adjustments downwards at this point either, as this would bring their monetary rate from 0.25% to 0%, effectively putting Canada into negative interest rate territory. It seems that North American governments are unlikely to go there unless things go really sideways. As we suspected in the previous Green Mortgage Team Quarterly (Issue 08), variable rate discounts did get better and we are now seeing most major banks offering Prime -0.6% or better for variable rates. I expect there is a little bit more room for them to get a bit better, but Prime -0.6% or Prime -0.7% has been the median rate for variable rate discounts over the past 15 years. The Bank of Canada decided on January 20, 2021 that they would not change the overnight lending rate, which did not surprise many. The next Bank of Canada meeting is on March 10, 2021.

DROPPING INCREASING

Lock-In Metre

DO NOT LOCK-IN TIME TO LOCK-IN

With central governments signalling that their rates are unlikely to rise until 2023 or even 2024, there is not much pressure to lock in your variable just yet.

That said, if you really feel more comfortable being in a fixed rate, they do not have much room to go any lower.

It is very important that you consider the impacts of being in a fixed rate mortgage in the instance that you break it early and pay an IRD penalty, as mentioned earlier in the fixed rates section of this article. A potential penalty that is five to ten times more expensive to break a mortgage could be devastating.