It looks like fixed mortgage rates have bottomed out. Monoline lenders and banks increased their fixed mortgage rates anywhere from 0.1% to 0.3%. But what exactly happened for rates to spike?
3 Reasons Why Mortgage Rates Increased
1. New Mortgage Rules
Effective November 30, 2016 as announced by the minister of Finance in early October, mortgage bulk insurance will be eliminated for mortgages above 25 years amortization, refinances, rental properties and properties over a million dollars which increases lenders cost of funding mortgages. The higher cost is passed on to consumers via a rate increase. It is interesting to note RBC is the first lender to publish two sets of pricing for mortgages of less than 25 years amortization and mortgages 25 to 30 years amortization. Other lenders will follow suit to reflect the new reality of lack of bulk insurance for 25+ years amortized mortgages
2. Trump Presidency
Donald Trump winning the US election shocked the markets. His inflationary economic policy; trillion dollars stimulus and big deficits have caused bond yields to spike. Probability of higher inflation has pushed the bond yields up 0.26% (0.96% from 0.697%) in one week, that's a 37% increase! This is a clear overreaction and a drop in the bond yields over the coming period would not be surprising
Image courtesy of www.MortgageDashboard.ca
3. Fiscal Year End
Many lenders fiscal year ends October 31 and they are not as hungry or aggressive enough in a new fiscal year for mortgages, i.e, they are ok selling mortgages at higher profits. Usually this lasts into mid January when the spring market ramps up and lenders tend to be more aggressive going after new mortgage business
Fixed or Variable?
Is it a good time to lock into a fixed rate? Let's look at the Trudeau government, it was sworn in a year ago and major infrastructure investments (inflationary policy) is yet to be announced. It takes time for "shovels in the ground" and inflation to take place. It's only then when the Bank of Canada would tap on the brakes and increase the benchmark (prime) rate. I believe variable mortgage is a strong contender, however every person's cash flow situation is different and for some paying an extra few dollars a month (fixed mortgages) is worth it. It is best to sit down with a mortgage broker to analyze one's situation and complete a cash flow stress test.