14 Feb

The big question on mortgage borrowers’ minds: fixed or variable?


Posted by: Gabriel Da Silva



With variable mortgage rates potentially at a peak and fixed rates having recently retreated, borrowers are asking themselves the age old mortgage question: should you go fixed or variable?

It’s a decision being faced by anyone in the market to purchase and those with upcoming renewals. And there are two schools of thought given where rates are and the current market dynamics.

Some will argue that a variable rate makes the most sense for borrowers who aren’t risk-averse, since they’re potentially at or near their peak for this rate-hike cycle. Discussion has shifted from future rate cuts to the timing of potential Bank of Canada rate cuts, which are expected early next year or even late 2023.

Variable-rate mortgages generally also entail a lower three-months’ interest prepayment penalty should the borrower break the mortgage early.

On the other hand, variable-rate mortgages are currently priced well above their fixed-rate counterparts with a spread of more than a full percentage point.

“Usually with variable rates, you get a discount for taking on the risk that your payment could rise in future. And, you are typically rewarded for taking on that risk,” mortgage broker Dave Larock of Integrated Mortgage Planners told CMT in an interview.

He said people often cite research by Moshe Milevsky, a professor of Finance at York University, which found variable rates have historically outperformed fixed rates 88% of the time.

“The challenge now is that rates have shot up. We’ve seen the sharpest series of rate increases in the postwar era,” Larock said. “And the question then becomes, is it worth it to pay a premium today on the bet that your variable rates are going to come down over the next five years?”

Larock notes the current consensus recommends most borrowers to get a fixed rate, “And I would advise most people to do that.”

Ron Butler of Butler Mortgage agrees. He recently commented on the fixed vs. variable discussion in a Twitter thread under the heading: “Why nobody should take a variable rate that is higher than a short-term fixed rate.”

He said the post was in response to calls by some to take a higher variable rate today on the presumption that they will surely fall within the next year or two.

However, he argued that variable rates need to be lower than comparable fixed rates in order to justify the added risk the borrower is taking on.

“Variables need to be [at] a clear discount to fixed, typically a 1% to 1.25%-lower rate than short-term 1- to 5-yr fixeds,” he wrote.

He also reminded followers that if the Bank of Canada raises its benchmark rate any further, anyone getting a higher-priced variable rate today will potentially be paying even more in interest than had they taken a fixed rate, with no guarantee as to the timing that rates will begin to fall.

“It is crazy to pay extra for additional risk,” he noted.

If you do choose fixed…
For well-qualified borrowers considering a fixed-rate mortgage, most are likely better off committing to a shorter, more flexible term, says Rob McLister, editor of MortgageLogic.news.

“The Bank of Canada implies a higher probability that its next move will be a cut than a hike and market pricing supports that,” he told CMT. “That’s far from a given, however. Rate hikes are not completely off the table and it may take several quarters for prime to fall. At this point in the rate cycle, however, history suggests that a short term is nonetheless a risk worth taking…for those who can afford to be wrong.”

McLister said he doesn’t advise locking in for five years unless the borrower is extremely uncomfortable with rate volatility and/or unequipped to handle any additional rate increases.

10 Feb

Red Hot Labour Market Despite Rate Hikes

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Posted by: Gabriel Da Silva


Today’s Labour Force Survey (LFS) for January was much stronger than expected, once again calling into question how long the Bank of Canada’s rate pause will last. This report showed no evidence that the labour market is slowing in response to the vast and rapid runup in interest rates.

Employment surged by 150,000–ten times more than expected–and most of the gain was in full-time jobs. The employment rate has returned to pre-pandemic levels. Employment rates among people 55 to 64 have been on a solid upward trend since the summer of 2022, mirroring the rise in employment over that period observed among most demographic groups.

Immigration remains a vital factor in hiring. According to the latest population estimates, in the third quarter of 2022, Canada’s population grew the fastest in over 50 years, mainly driven by an increase in non-permanent residents. In the Labour Force Survey, non-permanent residents represent the majority of a larger group, including those who were not born in Canada and have never been landed immigrants. Non-permanent residents can hold various kinds of work, study, or residence permits. On a year-over-year basis, employment for those not born in Canada and who have never been a landed immigrant was up 13.3% (+79,000) in January, compared with growth in total employment of 2.8% (+536,000).

Average hourly wages rose 4.5% on a year-over-year basis in January, down from 4.8% in December. This is good news for the inflation outlook, but it remains much above the 2% target. Year-over-year wage growth reached 5.0% in June 2022 and peaked at 5.8% in November (not seasonally adjusted).

The unemployment rate remained near a record low, holding steady at 5.0% in January, just shy of the record-low 4.9% in June and July last year.

Employment growth was most robust in wholesale and retail trade, healthcare, education, other services and construction.


Bottom Line

The Canadian jobs market is showing no signs of slowing. This has to make the Bank of Canada at least a bit nervous. The US jobs market data in January was also robust, and the Fed Chairman, Jay Powell, has assured markets that interest rates are likely to rise further.

This is the last jobs report before the Bank of Canada meets again on March 8. The CPI data for January will be released on February 21 and will be the primary factor determining Bank action. If inflation continues to decline, as expected, the rate pause will hold. If not…


Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres