Interest rates are unexpectedly dropping on five-year mortgages — and the global banking crisis is partly the cause
Friday Mar 24th, 2023
Experts says it might be time to lock in a pre-approval rate as a fall in the Canadian five-year bond yield is bringing down certain fixed mortgage rates.
Canadian homebuyers are about to get an unexpected break on their mortgages — in part, because of the global banking crisis.
Following the collapse of Silicon Valley Bank and Signature Bank, government bond yields have tanked, and as a result, mortgage lenders are slashing rates on five-year fixed mortgages, which are pegged to five-year bonds, by as much as 0.4 of a percentage point. And there may be more rate declines to come.
“It doesn’t hurt to lock in a preapproval rate right now,” said Robert Kavcic, chief economist at BMO Capital Markets, “especially if you’re finally looking for some relief on interest rates.”
Several mortgage lenders and brokerages have started slashing fixed rate mortgages by as much as 40 basis points, according to Victor Tran, a mortgage and real estate expert at Ratesdotca.
“And we are expecting more lenders to adjust rates this week,” Tran added. “If you are looking for a home, now is the time to get a pre-approval.”
Currently, fixed rates for five-year insured mortgages are at 4.49 per cent, according to numbers from Ratesdotca. Meanwhile for three-year insured they’re at 4.59 per cent for five-year uninsured they’re at 4.79 per cent and for three-year uninsured they’re at 4.89 per cent.
This can provide some long-awaited relief for buyers shopping for these kinds of mortgages, says said Ron Butler, mortgage broker of Butler Mortgages.
“For most of last year, a five-year fixed rate was somewhere between 5.09 per cent and 6.09 per cent,” Butler said. “Today we can find you a five-year fixed rate for just under 5 per cent.”
The fall in bond yields and subsequent lower fixed rates “is a reflection of the fact that most people and most of the economists and analysts in North America believe that the Bank of Canada has stopped raising interest rates,” Butler said. “And it would appear that soon the U.S. Federal Reserve will stop raising rates.”
While it’s unlikely fixed rates will drop as low as 2 per cent or even 3 per cent, Butler said they might be a better choice than variable rates moving forward.
“It is the greatest likelihood that for the next year or more that fixed rates will be a better value for Canadians than variable rates, which was not true for most of the last 35 years.”
For mortgage holders, Butler says the current situation could provide variable-rate borrowers, who have seen their rates soar amid inflation, with the opportunity to lock into a fixed rate.
However, he cautions mortgage holders and buyers to avoid five-year fixed rates.
“Our recommendation today is a three-year fixed,” Butler said. “If fixed rates are going to come down over the next year or two, you don’t want to be locked into a rate for a full five years. And right now the three-year fixed is the most attractive pricing, which in some cases is as low as 4.69 per cent.”
While buyers might jump at the opportunity to get a discounted rate and conditions might pull a lot of buyers off the sidelines, Kavcic says the stress on the financial system doesn’t bode well for credit availability.
“Yes, the cost of borrowing is down, but the availability of funds and overall credit conditions might be tightening up,” Kavcic said, adding that “it might be a trap depending on how the economy evolves.”
“The worst is over for sure — but it doesn’t necessarily mean the housing correction is over, if in the next leg we see credit conditions tighten and the economy weaken and we start to see some job losses,” he added.
“It doesn’t mean we’re going to just see a really quick turnaround just because mortgage rates have backed off a bit.”