Big banks raise short-term fixed mortgage rates as popularity grows

Over the past week, almost all of the six major Canadian banks have raised their shorter-term fixed mortgage rates.

Rate increases were largely limited to 1, 2 and 3 year fixed rate mortgage products, including special offers and posted mortgage rates. The increases were seen at TD, Scotiabank, RBC, BMO and National Bank of Canada, and ranged from 10 to 55 basis points.

But the big banks were not the only lenders to raise their rates on these terms.

According to data from MortgageLogic.news, the average discount rate available nationwide for insured and uninsured 1-year fixed rates has jumped 12 basis points and 20 basis points, respectively, since the start of the month. In comparison, average insured and uninsured 5-year fixed rates increased by 2 basis points and 5 basis points over the same period.

Ryan Sims, mortgage broker at TMG The Mortgage Group and a former investment banker, said the inverted yield curve was the main culprit.

“It’s very true that short-term fixed rates have moved a lot more,” he told CMT. “Currently, we are seeing that 1 and 2 year notes are paying much more than a 5 year note.

  • Jargon Buster: What is a yield curve inversion? Yield curve inversion occurs when short-term interest rates rise above long-term rates in the bond market. This indicates that more investor money is flowing into longer-dated bonds and generally signals growing pessimism about the near-term economic outlook.

As shown in the chart below, 2- and 3-year bond yields have now exceeded 5-year bond yields:

Why is this happening then?

As mentioned above, there has been increasing volatility in short-term economic sentiment among investors.

“Recent economic data has been consistently negative,” Sims noted, pointing to falling GDP in July and August, rising unemployment since June and net job losses in August that “rivaled unprecedented monthly data since the Great financial crisis”. of 2008.”

“While yield curve inversion is a subject of much debate, the length of time the curve has been inverted and the sheer amount of curve inversion signals to me that a recession is coming and it won’t be routine,” he added. .

“The BOC has signaled that fighting inflation is their sole focus, but I think they have to beware that medicine is stronger than diagnostics,” he said. “Inflation is a problem, but if we increase too far, too fast, then we risk the solution being bigger than the problem we are trying to solve.”

Given the sharp and rapid rise in mortgage rates over the year, many mortgage borrowers, both new and returning borrowers, have shifted to shorter-term rates, which are typically priced below most 5-year maturities.

Bank of Canada data shows that the volume of advanced mortgages for new and existing loans from chartered banks has shifted to terms of less than five years.

Between March and July (latest data available), funds advanced for fixed terms of 1 to 3 years increased by approximately 40% (for insured and uninsured mortgages), while volumes for fixed terms of 5 insured and uninsured years decreased 13% and 5%, respectively.

Sims added that another reason for recent rate hikes, besides inverting the yield curve, could be that banks have “discovered where consumer sentiment is.”

What strategy does this leave for today’s borrowers?

Rate expert Rob McLister, editor of MortgageLogic.news, says the best value is still usually found in the shortest terms.

“Everyone’s needs are different, but the sweet spot for most qualified borrowers is any 1-3 year fixed term near/below 4.50%,” he told CMT. Although its rate simulations are run using the OIS implied rate path, “that does not mean that these are the best-performing conditions.”

Another hedge for borrowers can be to split their mortgage between a fixed rate and a variable rate with a hybrid mortgage.

“Term selection is all about risk management,” he says. “If a 20% increase in your payments would break your family budget, mitigate the risk with a hybrid or (at least) medium-term fixed mortgage. The more qualified and liquid you are, the more you can bet on: (A) a shorter duration, or (B) additional variable exposure in a hybrid. »

Here are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parentheses.

Target rate:
End of year ’22
Target rate:
End of year ’23
Target rate:
End of year ’24
Yield on 5-year BoC bonds:
End of year ’22
Yield on 5-year BoC bonds:
End of year ’23
BMO 3.75% (+25 basis points) 3.75% (+25 basis points) N / A 3.30% (10 basis points) 3.05% (+5 basis points)
CIBC 3.75% (+50 basis points) 3.75% (+50 basis points) N / A N / A N / A
NBC 3.75% (+50 basis points) 3.00% (-25 bps) N / A 3.25% (+5 basis points) 3.05% (+5 basis points)
RBC 4.00% (50 basis points) 3.75% (+50 basis points) N / A 3.00% (+20 bps) 2.50% (+10 bps)
ScottishIa 3.75% (+25 basis points) 3.75% (+25 basis points) N / A 3.45% (+15 basis points) 3.15% (+15 bps)
TD 4.00% (+50 basis points) 4.00% (+75 bps) N / A 3.45% (+60 basis points) 2.55% (+25 basis points)

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