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Robert McLister: Adjustable-rate mortgages are suddenly hotter than vinyl summer overalls
Published on December 6th, 2024 • 3 minutes reading time
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Canada's most important economic report beyond the consumer price index (CPI) came out Friday morning. What we saw was unemployment numbers that frightened bond traders. When these financial veterans sense economic trouble, they pounce on it Government bonds like life rafts. This mad rush is causing bond prices to rise and longer-term interest rates to fall.
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As of this writing, the five-year Canadian government bond yield is falling to a nine-week low. This is likely to lead to a reduction in fixed interest rates in the short term, particularly default insurance rates, which adapt more quickly to changes in the cost of financing in the bond market.
However, the major banks that finance most mortgages in this country have recently become a little more margin-conscious. Given what is traditionally the weakest phase of the mortgage year, they are trying to offset the declining cash flow with higher margins per loan.
That's especially true for adjustable-rate mortgages, which are suddenly hotter than a pair of vinyl summer overalls. The Bank of Canada's interest rate cut next week should add to this demand. Variable interest rates are another reason why some lenders have quietly reduced their base rate discounts.
The net effect is that the central bank's rate cuts will result in slightly less savings for those taking out new variable-rate mortgages.
If you're already riding the wave of variable interest rates, the news is all good. You save 25 to 50 basis points on your mortgage. Derivatives prices in the bond market suggest that the probability of the latter is more than three out of four.
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“With continued slack in the labor market, GDP growth below potential and inflation on target at two per cent, we expect the Bank of Canada to make another rate cut next week by 50 basis points,” Oxford Economics economist Michael Davenport said in a report on Friday. This would be the second consecutive outsized rate cut for our central bank, which has cut rates more than any other G7 country.
A half rate would reduce the average adjustable rate mortgage lender's interest bill by about $120 per month, depending on what type of loan they have. If you multiply that by millions of mortgages, our economy suddenly has more stimulus than a Red Bull factory.
Higher consumer spending means a higher chance that inflation will bottom sooner and a lower chance that the central bank will have to cut by just as much next year. Not to mention the gas Trump is expected to put on US growth, which could indirectly help our struggling economy — Assuming Team Trudeau can talk the new president out of the painful Canadian tariffs.
On the fixed-rate mortgage side, rising unemployment and falling yields mean pressure on interest rates will ease in the near future. The next fireworks show comes on Wednesday. Then traders see the all-important US CPI report and can analyze forward interest rate advice from Bank of Canada Governor Tiff Macklem.
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If we ignore all of this market drama and just look at CanDeal DNA's forward interest rate data, it continues to suggest central bank rate cuts of 100 to 125 basis points. If this prediction proves true, variable mortgage rates and three-year fixed mortgage rates will be the most preferred. And wouldn't you know it, borrowers are already pushing for these terms like they did Insider information.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
Mortgage interest rates
The interest rates shown below are updated at the end of each day and come from MortgageLogic.news' Canadian Mortgage Rate Survey. Postmedia and imagination. Online Inc., parent company of MortgageLogic.news, will be compensated by certain mortgage providers if you click on their links in the charts.
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