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Fixed or Variable? Both Are Deeply Discounted as BoC Holds July Rate

Another Bank of Canada rate announcement has come and gone and its trend-setting Overnight Lending Rate has been left once again at 1.75%, where it has sat since October of last year. It certainly seems to be shaping up to be a stable rate environment for variable mortgage holders – but as bond yields also tease historical lows, is it an even better time for mortgage clients to lock in?

BoC Will Stick to Holding Pattern Long Term

The reality is, it’s a good time to be either type of borrower, as economist fundamentals set the stage for lower interest rates to stick around.

While the Canadian economy may have had a stronger showing in the second quarter of this year – rebounding from slumping oil prices and poor weather impacting spending – the Bank of Canada’s hands are somewhat tied by the dovish stance taken by other central banks around the world. That’s come as the result of rising trade tensions between the U.S. and China – with global exports hit hard, both the U.S. Federal Reserve and European Central Bank are likely to cut rates in the near future.

So far, the BoC has avoided the impulse to do so – yet it can’t forever, as bucking the monetary policy trend will put too much upward pressure on the Loonie. Despite the fact that the Canadian economy is “returning to growth and potential” due to flourishing jobs, housing market, and exports, the BoC acknowledges that “escalation of trade conflicts remains the biggest downside to the global and Canadian outlooks.”

A Rate Cut Could Happen in 2020

In fact, the BoC is widely expected to stick to status quo for the remainder of 2019 and may even slash its rate come 2020, especially if growth patterns subside.

In a Reuters poll of 40 economists, they widely forecasted zero rate movement this year, while 40% called for a rate cut early next.

For those who currently hold a variable-rate mortgage, it’s the best of both worlds – there’s little reason to anticipate any upheaval to their existing budget and payments, and they may even be in store for a discount next year, or to see more of their payments going toward their principal.  For those with the risk tolerance to take on a new variable rate mortgage, the BoC’s currently forecasted trajectory may seem increasingly attractive.

Fixed Mortgage Rates Approach Variable Discounts

However, consumer banks have been aggressively discounting their fixed-rate offerings as well, as five-year bond yields remain historically low, well below the 2% mark. That’s narrowed the gap between fixed and variable pricing – and in some cases, have led to the former priced even lower, by some discount brokerages, a phenomenon not seen since the mortgage pricing skirmishes prevalent roughly four years ago, when dropping oil prices prompted the BoC to cut its rate for the first time since 2010.

Regardless of which rate type proves to be more popular, the BoC foresees prolonged discounting to drive recovery in the housing market. “At the national level, the housing market is stabilizing, although there are still significant adjustments underway in some regions,” the Bank stated in its July announcement. “A material decline in longer term mortgage rates is supporting housing activity.”

Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully across the nation, including Calgary condos and Vancouver condos for sale. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.

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