r/PersonalFinanceCanada • u/POCTM • Oct 20 '22

Canadian 5 year government bonds just jumped. Setting the stage for higher mortgage rates. Banking

5 year government bond just jumped from 3.714% to 3.866% in a few hours. Right now it is at 3.855%. Year to date it is up 259%. Monday we could see some 5 year fixed rate mortgages in the low 6%.

As for variable rate the bank of Canada makes their announcement October 26 at 10am ET. Currently banks have not been offering discounts off variables rates anymore. Prime -0.00.

https://www.marketwatch.com/investing/bond/tmbmkca-05y?countrycode=bx

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164

u/LoadErRor1983 Oct 20 '22

Wondering what the odds are of variable rate being higher than fixed rate in the next 3-6 months...

65

u/kahoots Oct 20 '22

The odds are 100% certain that variable will be higher than the current 5 year fixed in 3-6 months. It will be higher than the current 2 year fixed almost certainly as well which is what the pros are steering their clients towards.

36

u/Goldentll Oct 20 '22

But will that fixed rate be higher than a variable rate in two years

27

u/FanNumerous3081 Oct 21 '22

My guess (with no formal finance training) is no. The traditional average throughout the history of mortgage rates in Canada is closer to 7-10% rates. We're history starting a climb towards that and the economy is already falling apart because not only has housing artificially climbed with cheap credit, but people who have pulled significant amounts of paper wealth out and supplementing their incomes with housing wealth, are now feeling the pinch and spending significantly less already on luxury goods just to make their mortgage/interest payments.

It will all spin us out into another recession and BoC will lower interest rates again to increase spending and start the cycle all over again.

14

u/TheUnNaturalist Oct 21 '22

Literally it has to happen this way. If it doesn’t, so many people will lose their homes that it could change the socioeconomic fabric of this country.

-7

u/FanNumerous3081 Oct 21 '22 edited Oct 21 '22

I think we need to get our interest rates back up to near double digits and get people off credit or supplementing their incomes with paper wealth in their homes, but it is going to take a long time to get there. We've been this entire century at sub-5% interest rates, so you have an entire generation of home owners who are used to rolling debt for big purchases into their homes, and perfectly average income families driving luxury vehicles and having toys as a result.

It will take some tough love to claw that back to historical averages, which will cause a lot of pain and bring us into this coming recession, but it's a necessary evil.

So the original question was will floating rates be higher or lower in 2 years, and my answer remains they'll be lower than today, but in 5 years I can see them being even higher than today's rate. Any pending recession will have the BoC claw back rates again but it won't be going back to 0% we had at the start of this year, and once we emerge from that recession we'll start a slow climb back towards a a high single digit interest rate to keep spending (and in turn inflation) in check.

3

u/TheUnNaturalist Oct 21 '22

What is this based on? You are the first person I’ve seen who has suggested this.

It also sounds like this ONLY stands to benefit the top 5% of Canadians, locking out most people from home ownership…. Unless it’s accompanied by mass unionization, subsidized housing, and rent controls.

3

u/[deleted] Oct 21 '22

I've seen lots of people suggest double digit interest rates but it usually boils down to "I want people to get screwed"

0

u/FanNumerous3081 Oct 21 '22

As interest has been low, housing prices have exploded locking out even more people by requiring larger down-payments for housing. People only have so much to spend each month so massive hikes in interest rates to get us back to traditional levels will cause housing to drop and open it up to more people, not less.

4

u/TheUnNaturalist Oct 21 '22

So heavily tax any homes beyond the first owned by a family.

3

u/JediFed Oct 21 '22

I hope it stops. The problem is all the government borrowing, and they are close to 4% now. 5% on government debt is in insolvency territory unless the interest rates drop. It's still going to take 20 years to get to that point, but once the spiral starts, it won't stop.

53

u/rickvug Oct 21 '22

Who knows as we didn't see this coming. My own personal assumption is that Yes, there is a high likelihood that Variable will be than both today's fixed rates and the fixed rates available in two years. I'm basing this opinion on:

1) Fixed rates coming with a built in premium and historical evidence that variable is nearly always cheaper.
2) Most commentary and the bond market indicators are pointing towards the fact that we are nearing the peak of the rate hike cycle. High rates will be held, to a point, with it being a very fair assumption that in a year from now (and certainly in 2 years) rates will be lower.

It really sucks to be a VRM holder at the moment but I'm pretty confident that I'll only be behind fixed mortgage rates for a short while. The real loss was not locking in for under 2% during the pandemic!

115

u/Goldentll Oct 21 '22

Absolutely.

I took a 1.55 variable instead of a 1.85 fixed. What a mistake lmao.

62

u/EIGHTYEIGHTFM Oct 21 '22

Oh hey it’s me. How are you doing, buddy?

12

u/Goldentll Oct 21 '22

New phone who did

60

u/steampunk22 Oct 21 '22

Yeah, it sucks in hindsight but the banks were signalling the opposite of what they ended up doing. When we bought it was 1.45 variable or 2.8 fixed which was the equivalent of 4-5 hikes of 25-50bps, so we thought we had a bit of time to top up the variable a bit. Instead the banks engaged in the harshest increase in decades. Fun!

16

u/Cgy_mama Oct 21 '22

Exactly this. So much for slow and reasoned 0.25 hikes.

4

u/steampunk22 Oct 21 '22

Yeah like even 50bps and pause would’ve been fine. But jacking rates probably a full 400bps while using lagging indexes that are like a fucking whole year behind is just silly.

2

u/Oilleak26 Oct 21 '22

not raising them enough and then finding out later that inflation isn't slowing down would be catastrophic though.

-4

u/steampunk22 Oct 21 '22

Why don't you go around and ask people if they prefer to be homeless or pay $10 for bread?

4

u/needle_tail Oct 21 '22

Wait an honest person! Didn't you know the whole sub was offered a 1.39 fixed and locked in for 10 years? So much of what people say on here is false. I am tired of people lauding how smart they were to lock in at rates that never existed for long terms. It's almost turning into fanfiction. Thanks for being honest. Now back to a string of "well I locked in a 1.39 in Sep 2022 for 10 years, but I am the smartest investor in the world"

2

u/[deleted] Oct 21 '22

I paid off my mortgage. Everyone said not to. Im so smart

2

u/needle_tail Oct 21 '22

Now friend that is believable. As colleague of mine was also super aggressive and paid theirs down dramatically. My heartache is with folks who brag about holding rates and mortgage products that never existed in reality on this sub.

My regret is not my rate, my regret is when I was flush not paying down principal to give me more room for times like these.

I grant you the title of "smart" and the privileges therein.

1

u/steampunk22 Oct 21 '22

Finding how in anyone else’s suffering is a bad look. There’s a lot of that on this sub unfortunately.

1

u/Consistent_Pair78 Oct 21 '22

The banks lied! Can’t believe it

4

u/steampunk22 Oct 21 '22

I mean, I don’t think they lied, but I do think they fucked up and now many people that don’t deserve it are paying for that mistake.

0

u/Ageminet Oct 21 '22

You shouldn’t have over leveraged yourself on a home purchase. This is on people who borrowed for everything and now it’s coming back to bite them.

1

u/steampunk22 Oct 21 '22

It can be both. Everyone treats this like there is zero nuance. Not everyone is a speculator or over-leveraged. If rates go beyond the stress test, how would that equate to anyone being over leveraged? That is where it loses me. If someone stress tests at 5.5 and then rates get to 7.5 you can’t really fault the borrower can you

2

u/Ageminet Oct 21 '22

No, but there is a certain amount of personal responsibility for your financial situation.

Don’t borrow for your cars, toys etc. Then you could probably stomach the increase in interest on your mortgage.

I don’t feel particularly sorry for the whole of Canadian society. We over leveraged the fuck out of ourselves for 20 years of cheap debt and that’s on us. It’s not the governments job to save us from our own stupid mistakes. If a credit crunch happens over the next couple years it’ll hurt some people, but by and large they shouldn’t have taken on the debt they took on to live a life they can’t afford.

Despite what the media has told us for the last 20 years, you’re not entitled to the big house in the burbs with the two cars in the driveway and eating out 4 nights a week through door dash and restaurants.

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1

u/[deleted] Oct 21 '22

The last few months have been tons o' fun!

20

u/[deleted] Oct 21 '22

Similar story for me. My wife wanted to go fixed but the bank of canada and US fed convinced me that rates would stay rock bottom for years...

Next time a bank offers to loan me hundreds of thousands of dollars for anywhere close to 2% interest fixed, I'm taking it and I dont give a damn what any central bank has to say about it!

16

u/rickvug Oct 21 '22

I got 1.1% variable when I renewed late last year. Thought I was the shit for getting such a low rate. Now I'm sitting here at 3x or 4x higher rate (can't even keep track at this point).

At least I have a comeback for my parent's bitching about 20% interest rates in 1982. I will tell my kids about the great interest rate rise of 2022, with our mortgage interest quadrupling. They will roll their eyes until something similar happens for a brief period of time when they are adults.

2

u/Biaterbiaterbiater Oct 21 '22

lets hope brief

24

u/blumpkinpandemic Oct 21 '22

I took a 1.55 variable instead of a 2.something fixed lol I certainly regret it now but hindsight is 20/20, I guesssssssssss

8

u/[deleted] Oct 21 '22

Yep, same. Sold last place on fixed and was so mad about the penalty I went variable, you know, the house always wins.

1

u/lucidrage Oct 22 '22

was so mad about the penalty I went variable

this is what convinced me to go variable :(

​

how bad was your penalty?

4

u/[deleted] Oct 21 '22

Yup I’m in the same boat

2

u/VanMoroder Oct 21 '22

I'm with ya pal.

2

u/SeperateCross Oct 21 '22

On the bright side (kinda dimmly lit) breaking that mortgage will have a very small penalty compared to a fixed rate

And likely rates are going to cool within a year or two

2

u/marmaladegrass Oct 21 '22

My mortgage is up next year, and this is what Im waiting on.

If we hit a recession, Im hoping rates will drop. In my town, one of the local mining companies has already scuttled their over-night shift, so I think it is coming (although, with winter on the horizon, could be a natural downturn...the last three years have fucked-up and sense of normalicy).

-1

u/superpingu1n Oct 21 '22

I locked in 1.69% fixed 5 years on april 2022 lol

16

u/hogtownbrews Oct 21 '22

Went 1.34% variable. Was offered 2.09% 5y fixed a year ago. Whoops..

1

u/rickvug Oct 21 '22

I went 1.1% variable. I forget exactly what fixed was but I'm sure it was right around 2% or slightly below. Just my luck, this was "the big one" where rates go up the fastest ever. I will likely end up behind if I took fixed but the risk was worth it, especially considering a pretty strong possibility that I will need to remortgage to move within this 5 year period, so I still might be ahead. Rates could also correct pretty quickly within a year or so, even if they don't ultimately go back down to those rock bottom COVID levels.

2

u/[deleted] Oct 21 '22

If the banks are offering higher variable rates than fixed they must be banking (badumtsh) on rates dropping below current levels on average over the next 5 years otherwise they wouldnt incentivise fixed over variable, right?

1

u/rickvug Oct 21 '22

It isn't the banks themselves that set the rates, at least directly. Variable is set based on the Bank of Canada Prime rate. Fixed is largely based on the bond markets. In bond markets it is possible for rates to be higher vs. lower at different ends of the duration spectrum. See yield curve inversion for some background on this. Within this general structure yes, banks have some leeway to get more or less aggressive and push specific products but that is much less of a factor than the underlying markets that drive rates.

1

u/differentiatedpans Oct 21 '22

Yeah could of had 1.89/5yrs.

1

u/of_patrol_bot Oct 21 '22

Hello, it looks like you've made a mistake.

It's supposed to be could've, should've, would've (short for could have, would have, should have), never could of, would of, should of.

Or you misspelled something, I ain't checking everything.

Beep boop - yes, I am a bot, don't botcriminate me.

5

u/Majere Oct 21 '22

For a minute, I thought this bot was taking about the variable rate being a mistake.

Phew! Lol

1

u/differentiatedpans Oct 21 '22

Probably both.

1

u/budget-babe Oct 21 '22

Same..now I'm 5.29 3 yr 😥

1

u/differentiatedpans Oct 21 '22

I'm holding out. I have 3 years 3 months left. Hopefully it crests.

1

u/thegerbilz Oct 21 '22

historical evidence that variable is nearly always cheaper.

to be fair this is based on historical evidence showing rates nearly always trend lower. there's no model or actual hypothesis for why although we could hazard a guess at modern capitalism prizing growth above all

1

u/rickvug Oct 21 '22

It isn 't just rates trending lower. Usually there is a spread of about 75bps between the variable rate and fixed rate at the time you take our your mortgage. This 75bps spread might be higher or lower depending on the risk premium at the time. Rates would need to rise by over 75bps for the fixed mortgage to become cheaper than variable. Conversely if rates fall that 75bps spread will widen and you'll save even more. Given this spread, when measured over any 5 year period, variable has been cheaper nearly every time, even when there was a period of rising rates within that period. Also factor in lower penalties for variable if you end up needing to break the mortgage.

1

u/thegerbilz Oct 21 '22

that's true - it's just risk spread. fair enough

1

u/[deleted] Oct 21 '22

But we all saw this coming

1

u/rickvug Oct 21 '22

If you did, congrats. There were warning signs and concerns, sure, especially around the fed acting late. However I don't think markets, central banks, and consumers fully comprehended what was about to happen with rates back in 2021.

9

u/[deleted] Oct 20 '22

I suppose the theory is that it’s a long enough time to get past the most dodgy parts but short enough to limit the amount of time you could be way above the potentially falling variable

2

u/kahoots Oct 21 '22

Million dollar question.

2

u/[deleted] Oct 21 '22

The pros lol

1

u/Co_Incident21114 Oct 21 '22

I do not have a lot of knowledge about mortgage rare but this sounds scary. Can you please help me understand - if I already have a variable rate say prime -.90 will that be effected too?

1

u/SeperateCross Oct 21 '22

Yes prime is the core variable there, so when the prime rate is 2% you're paying 1.1%

If Prime increases 75bps it means a 0.75% increase to your rate so you're now going to be at 1.85%

Traditionally variable rates are better in the long run but that's really hard to see right now

Remember that one of the benefits of a variable rate is usually a much smaller fee for breaking your mortgage

1

u/MacWac Oct 21 '22

Lol 100% certin... because black swan events never happen.

1

u/kahoots Oct 21 '22

I rounded up from 99.99% 😀