The landscape of mortgage rates is undergoing an intriguing divergence. While it seems variable mortgage rates are peaking, or coming very close, their fixed-rate counterparts are taking a different path, exhibiting a downward movement that's catching the eye of borrowers and lenders alike.
Fixed interest rates are about to fall
In an interesting turn of events, certain lenders and national brokerages have initiated a gradual reduction in rates for specific terms since the month kicked off. The average 5-year fixed mortgage rates available nationwide have descended by approximately 20 basis points from their position earlier in the month.
This downward adjustment mirrors the recent dip in the 5-year Government of Canada bond yield, which is often a forerunner for fixed mortgage rate trends.
On Monday, the 5-year bond yield concluded the day at 3.05%, making a modest recovery from its 5-month nadir of 2.80% witnessed the previous week. Although there's been a significant drop from the 3.40% observed four weeks prior, and even more so from the 14-year zenith of 3.89% reached in October.
Speculations on the Fixed Rate Peak
The phenomenon of fixed mortgage rates declining isn't novel, yet it prompts speculation about their peak — especially in a climate where recession forecasts loom and the brunt of inflation appears to have passed. Ben Rabidoux from Edge Realty Analytics shared his insights during a client webinar, stating, "We’re starting to bump up against some resistance on fixed mortgage rates." Rabidoux projected a very plausible scenario where we have already seen the summit of fixed mortgage rates, which now seem to be on a retreat.
He also noted the significant gap of around 120 basis points between fixed and variable rates, indicating market anticipation of Bank of Canada rate reductions later in the year. "This divergence is signaling that the bond market has moved past the worst fears of inflation," Rabidoux explained.
If this trend persists, Rabidoux believes there's a "very good chance" that 5-year fixed rates could descend into the low fours by the time the spring home-buying season blooms.
The Rise of Short-term Fixed Mortgages
As the market anticipates declines in rates, borrowers are increasingly opting for short-term fixed-rate mortgages. The Bank of Canada's data corroborates this shift, revealing that a substantial 31% of all new mortgage originations as of November had a fixed-rate term of under three years. We anticipate this trend to continue if the rate reduction expectation holds true, and more folks choose a 1- or 2-year. A year or two from now, rates are going to be substantially cheaper at renewal.
Concurrently, the variable-rate mortgage products, which dominated nearly 60% of new mortgage originations last year, have settled back to a more average share. As of November, they constituted 22% of new originations.
Looking Ahead
The mortgage rate terrain is clearly in flux, and borrowers seem to be playing a strategic game, hedging their bets on short-term fixed rates in anticipation of a more favorable rate environment in the near future. The financial crystal ball hints at a softening of rates, potentially good news for those in the market for a mortgage. For now, the trend towards declining fixed mortgage rates spells an opportunity for potential homebuyers and those looking to refinance. Keep an eye on the bond yields and bank announcements — they may very well dictate the tempo of mortgage rate movements in the months to come.
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