Hopes are high that positive COVID-19 vaccine news from Pfizer and Moderna will mean the end of the pandemic is nearing, but it could also mean the days of record low five-year fixed rate mortgages are behind us.
Fixed rate mortgage movements are based on Canadian five-year government yields, which had been depressed because of the pandemic but rose on euphoria of a return to normal when the vaccines become available.
That doesn’t mean mortgage payments will suddenly go through the roof, but it does mean waiting for a better deal might be wishful thinking. It also means households with stretched budgets need to pay attention before taking on a new mortgage or locking in.
According to calculations by LowestRates.ca, the monthly payment on a five-year fixed mortgage of $500,000 with a 25-year amortization period at 1.49 per cent is $1,996. A 0.35 per cent increase brings the monthly payment to $2,079, a difference of almost $1,000 a year or $4,980 over the five-year term.
LowestRates.ca CEO Justin Thouin says it’s possible for the trend to reverse but expects a slow move off the bottom, with rates staying low for the next couple of years because there’s still a great deal of uncertainty around the pandemic, the economy, and the job market.
He thinks it’ll take some time for bond yields to get back to the 1.5-1.6 per cent of January 2020 pre-pandemic, compared to the 0.50 per hit when the vaccine news first broke, which was a 10 basis point jump from the previous week.
“Back then the Bank of Canada policy interest rate was 1.75 per cent. And the Bank of Canada has already told us they’re not even thinking about hiking rates until after 2022.” Thouin told Yahoo Finance Canada.
“If you look to 2016, the 5-year yield was roughly where we are now. The Bank of Canada began hiking rates shortly after in 2017 and the 5-year peaked at just under 2.4 per cent in 2018. Back then, fixed-rate mortgages were around 3 per cent.”
Bank of Canada will proceed with caution
The Bank of Canada has tools to keep rates low for now, and CIBC senior economist Avery Shenfeld expects the central bank to use them before eventually scaling back in a post-vaccine world.
“In the next few months, the Bank of Canada’s commitment to leave overnight rates on hold, coupled with its bond purchases that are aimed at keeping mid-term rates from climbing too much while the economy needs help, should keep five year Canadian bond yields well grounded,” Shenfeld told Yahoo Finance Canada.
“They are likely better anchored than either 10 or 30 year yields which are more heavily influenced by the direction of global yields.”
Shenfeld says the tradeoff for the housing market of an eventual easing of bond purchases in a post-vaccine world will be the drag from higher mortgage rates but the benefit of a stronger job market
Higher rates won’t kill Canadian housing markets
Much of Canada’s real estate markets have been on an improbable record run. Prices and sales have defied expectations. Higher interest rates typically pour cold water on rallies like this, but BMO senior economist Doug Porter says we’re not there yet.
“Bond yields initially popped on the recent vaccine news, but have settled back somewhat on the view that first the global economy will need to get through a tough winter,” Porter told Yahoo Finance Canada.
“Canadian five-year bond yields, for one, are up a moderate 4 basis points to 0.44 per cent from pre-vaccine-news levels (not a major move). That, by itself, will not move the needle for the housing market.”
Porter also expects vaccine developments to eventually push bond yields higher by reinforcing and sustaining the recovery.
“But even by the end of 2021, we are only looking at a rise of roughly 25-20 bps from current levels. While that will modestly dampen housing markets, it’s certainly not enough to singlehandedly turn the tide,” he said.
Fixed or variable rate mortgages
Fixed rate mortgages aren’t the only game in town. A string of cuts to the overnight rate by the Bank of Canada means variable mortgage rates can be had at rock bottom rates.
LowestRates.ca’s Justin Thouin says the attractiveness of one over the other depends.
“Right now, the spread on LowestRates.ca is 10 basis points.”
“This is not the lowest it’s been -- in fact, we were in a bizarro mortgage rate situation last year where variable rates were higher than fixed -- but it’s unusually low if you look at history. If bond yields continue to rise, fixed-rates will continue to pull away from variable rates.”
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.