[Globe and Mail – February 26, 2021]
Bay Street expected higher interest rates – but not this high, this fast. And we’re now starting to see the impact on those shopping for mortgages.
Canada’s five-year government bond yield, which leads fixed mortgage rates, surged past 1 per cent on Friday morning, its highest since before the Bank of Canada cut rates last March. That’s a 50-basis-point move in nine trading days, the likes of which we haven’t seen since 2010. (There are 100 basis points in a percentage point.) In late afternoon trading on Friday, the yield slipped back down to 0.89 per cent.
TD Canada Trust TD-T-1.19% decrease was the first big bank to react Friday with a boost, by a quarter of a percentage point, to its “special” five-year fixed rates. At 2.24 per cent, its uninsured five-year fixed is now the highest it’s been since September. Other major banks should be right on TD’s coattails.
We’ve written about a rate rebound since November but most borrowers are feeling blindsided. They’re now flooding lenders with mortgage applications to lasso fixed rates that could be gone next week. And you can’t blame them for the urgency. A quarter-point rate boost translates into real dough: $3,500 of extra interest on your average new $300,000 mortgage over five years.
Every lender I speak with is reporting application volumes more than 50 per cent above normal for the last week in February.
“Mortgage applications continue to remain higher than historical volumes, as they have throughout the winter, and we are preparing for what we believe will be a robust spring market,” said Jonathan Bundle, HSBC’s head of products – mortgages wealth and personal banking. “With the volatility in bond yields, we will need to respond to any significant rise in the cost of funds, while remaining committed to offering very competitive rates to our customers.”
Rate lock pointers
For those needing financing this spring, here’s some advice:
1. If your home purchase closes in the next four months and you don’t have a mortgage pre-approval yet, get a rate guarantee, pronto. Get one this weekend, or Monday at the latest.
2. Pre-approval rates are seldom as low as the lowest rates you see online. They’re often 15 to 30 basis points higher than rates for “live” mortgage applications with a set closing date and property address. But that doesn’t matter in this case because some kind of rate protection is better than none.
3. Don’t overlook mortgage features. Unless you’re certain your life won’t change in five years (is that possible?), you need to shop for the most cost-effective, flexible rate you can find – one with reasonable prepayment penalties, one that gives you enough time to “port” to a new property if you move, and one with prepayment ability and minimal refinance limitations.
4. If you apply directly with a lender, make sure that lender has confirmed receipt of your application and acknowledged your rate guarantee. If you apply with a broker, your rate is not held until that broker validates your application and submits it to the lender, which can take a day or two when things get busy.
5. Interestingly, TD also slashed its variable rate by 20 basis points on Friday, to 1.55 per cent. Other banks may do the same. It’s an attempt to make variables relatively more appealing while fixed rates rocket higher. But if you don’t have a strong stomach for rate volatility and are not rock-solid financially, don’t bite. There are still fixed rates within a quarter-point of variables. Floating your mortgage just to save a smidgeon of interest upfront is no longer worth the risk.
6. If you’re refinancing a closed mortgage with a penalty, get a rate hold immediately, but don’t rush to close. With any luck, short-term interest rates will rise in the next month or two, which can lower prepayment penalties. (The smaller the gap between your fixed rate and the rate a lender can lend at today for a similar time frame, the smaller the interest rate differential penalty.)
Watch what they do, not what they say
Here’s one last point about central bankers, who seem to be saying, “There’s nothing to see here, folks.”
The Bank of Canada suggests it’ll keep rates low “for quite some time,” but the bank’s crystal ball isn’t exactly infallible. Indeed, those may prove hollow words if inflation runs hotter than expected and governments issue more bonds than expected – which is what the market is fearing at the moment.
Of course, the Bank of Canada could always cap yields (a.k.a. “yield curve control”), but that unorthodox move might only fuel inflation further, among other nasty side effects.
So, if you’re trying to decide whether to take your mortgage cues from: a) a central bank that seems behind the curve, or b) bond traders who bet billions of their own dollars on rate direction every day, may I suggest choosing the latter – this time.