Mortgage shoppers get short-term fixed rates

Given today’s near-record consumer leverage and the near-record pace of rate hikes, one thing is clear. Borrowers are stuck in one of the toughest rate hike cycles in Canadian history.

However, mortgage buyers are increasingly inclined to believe that the rate runaway will be reversed within 12 to 24 months.

data from Statistics Canada Shows the percentage of borrowers who chose 1 and 2 years. Fixed fee This year it has more than doubled.

Nearly one in five borrowers (19%) opted for a 1- or 2-year term in the final tally in August. That’s up from just 8% for her a year ago.

Clearly, fewer and fewer people want to commit long-term to unappetizing interest rates like 5.25%. (Percentage points have 100 basis points (bps).)

More and more people want to play the “short and refinance” game. In other words, we commit to short-term rates so that we can cut rates in 2023 or 2024.

Assuming that the 2023 recession wipes out excess economic demand and we get nothing more, inflation That strategy should work (note the word “should”).

reward

The Federal Reserve’s average rate hike cycle has lasted 21 months since the Fed began setting targets for Fed Funds rates in 1982. chatham financial.

During that time, the highest amount the Fed has raised in a single cycle was 425 bps.Likely to raise much more this time around 500-525bps, according to ever-changing futures market expectation.

A Fed funds rate of around 5% is enough to bring inflation down towards the 2% target.

why do you run out?

1- and 2-year fixed interest rates allow borrowers to avoid all interest rate risk for the duration of the term. This contrasts with floating rates, which are almost certain to rise another 50 basis points or more.

Now fast forward 12 to 24 months. Then, if bond yields drop significantly (which is usually the case when you start pricing in central bank rate cuts), those currently using short-term fixed rates can move to significantly lower rates.

risk

This all sounds good on paper. mortgage today.

But I’m not you Everyone’s situation and comfort level is different.

The key point to remember is that risk management is always your number one job. Well-conceived plans often go awry, and as he heard from Fed Chairman Jerome Powell on Wednesday, central banks tend to tighten more than they tighten too much.

Moreover, any number of unknowns can lead to longer inflation.

Consider this. If you get a 1-year fixed at the lowest uninsured interest rate available nationwide today (5.65%), and if the interest rate is 200 bps higher for 12 months at renewal, you’ll see a $472 increase in payouts over 25 years of amortization. You can see A $400,000 mortgage – or the pain of paying $118 a month for every $100,000 borrowed.

And it would be remiss not to mention the progenitor of all the unexpected rate hike cycles from 1978 to 1981. Back in 1978, the market thought inflation was under control. After that, interest rates doubled for him in 26 months and almost tripled in 42 months. This is clearly a historically exceptional case, but a painful one.

safety first

Given the risks mentioned above, gambling on a fixed year is not suitable in most cases, especially in the absence of a significant financial safety net.Eligible borrowers who want more certainty to weather this storm should choose instead at least Fixed for 2 years.

That two-year term provides an additional year of interest rate protection if inflation persists and the Fed and Bank of Canada have to raise interest rates.

Also, when possible, choose a lender that imposes a fair upfront penalty. That way, if interest rates plummet by the end of next year (not a prediction), you can cancel your mortgage and refinance early.

Can mortgage shoppers expect stress test rates to ease?

Remember, no matter what happens, no one can predict your mortgage interest rate consistently and accurately. Relying rate strategies on market expectations and history is fraught with danger. But we do know at least one thing. Canadians cannot sustain a 6-7% mortgage rate for long. That means it’s rate limited and not far from there. Therefore, it is very likely that this rate hike cycle will be over in months or quarters rather than years.

Long-term fixed interest rates begin to gradually decline

Five-year mortgage financing costs associated with the bond market have fallen more than 40 bps over the past nine days of trading.

As a result, smaller lenders have started to cut 5-year fixed rates by 10-20 bps. So far, the big banks have not moved. And based on the fact that 5-year yields plummeted by 100 basis points this summer, but bank rates have not fallen significantly, we do not expect any serious fixed-rate cuts by the big banks in the near term. .

Lowest mortgage interest rates available nationwide



semester uninsured provider Insured provider
1 year fixed 5.65% Alterna Bank 5.14% quest mortgage
2 years fixed 5.47% simple 5.14% quest mortgage
Fixed for 3 years 5.49% simple 4.99% quest mortgage
Fixed for 4 years 5.49% simple 4.99% quest mortgage
5 years fixed 5.29% Alterna Bank 4.94% Canwise Financial
Fixed for 10 years 5.94% HSBC 5.94% HSBC
variable 5.45% marathon mortgage 4.75% nest
5 year hybrid 5.50% HSBC 5.56% Scotia eHOME
Herlock 5.85% tangerine none none

The rates in the attached table are as of Wednesday for providers who advertise rates online and lend in at least nine states. The premium rate applies to those purchasing with a down payment of less than 20% or switching an existing insured mortgage to a new lender. Uninsured interest rates apply to refinancings and purchases over $1 million and may include applicable lender interest rate premiums. Providers with different rates in different states will be shown the highest rate.


Robert McLister is an interest rate analyst, mortgage strategist and MortgageLogic.NewsYou can follow him on Twitter. @RobMcLister.

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