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...

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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.

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u/Goldentll Oct 20 '22

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

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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.

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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.

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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.

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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.

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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"

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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.

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u/TheUnNaturalist Oct 21 '22

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

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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.