Loan rates can be yo-yo | Financial post

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Loan rates can often be disappointing. Case in point: for today. We analysts have been talking about prices sinking for months, and yes, they have gone down. Fixed rates are down 150-plus basis points for the year.

But with all the falling price headlines lately, people expect more. And we may not get more – for a while.

We are now five months from the Bank of Canada’s first rate cut of the cycle and fixed rates are rising like people’s blood pressure during tax season.

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Rates aren’t rising stratospherically, mind you, about nine to 25 basis points from some of the lowest advertised fixed rates. Auto insurance rates — used by people with down payments of less than 20 percent — are the most competitive, so they go up the fastest.

While the recent surge may have people on edge, the real suspense is about what’s next.

When central banks start cutting rates – especially significant cuts like the half-pointer cut by the United States Federal Reserve last month – it’s usually a sign of economic stress. And central banks and economists are very much expecting such a decline – over time.

The question is, what does “in time” mean?

The economy is like a large ship running slowly. Currently, the US economy – which has a strong influence on Canadian mortgage rates – seems to have reset its title. Markets are slowly starting to predict a bigger increase than expected.

The Atlanta Fed’s real-time GDP index, for example, suggests a peppy 3.2% growth rate. That’s higher than the latest U.S. job numbers, which beat expectations. Then there’s US inflation, which beat forecasts on Thursday despite a 44-month low.

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Canadian equity markets are very sensitive to any inflation risk, including from south of the border. Traders are betting heavily on rate cuts over the next 18 months, fearing they will be wrong and fearing they may underestimate the recovery in the North American economy. If they are wrong, then bond yields can pull a Jack-in-the-box, growing when we least expect it.

What does all this mean for mortgage buyers?

This is not so much a crystal ball prediction as it is an attempt to manage borrowers’ expectations. Although the economy should eventually decelerate significantly, because policy rates are materially higher than inflation, we may have a few months of inflation. It’s like waiting for a hangover to kick in, but somehow you’re still full from brunch.

Expect to see more market anxiety if US employment remains stable and inflation does not continue its downward trend this fall. And the latter is likely given strong year-to-date results.

Jargon buster: “Base effects” on inflation refer to the effect that the previous year’s price levels have on the current year-to-year inflation figures; in particular, if prices were unusually low in a given month last year, even a modest price increase this year may result in a higher rate of reported inflation.

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It’s also possible that inflation risks are coming from the left, from things like an oil shock, continued government spending, inflation (looking at you, Donald Trump), and inflation. Fortunately, central bank policy rates are still in place, high housing costs, expensive home renovations, high debt and artificial intelligence will continue to add downward pressure on rates.

The point is, despite borrowing costs being low, rates can yo-yo a bit. If you need a fixed mortgage in January or February, get a rate guarantee in case the rate progress takes longer than expected.

And if you’re worried about inflation making a return trip, consider a hybrid mortgage (fixed part/adjustable part) if you can get one at 5 percent. That way, you are partially protected in the event that inflation gets tough, but you still benefit if/if rates continue to fall, as economists predict.

In other news: the return of 90 percent refinances

Canadians used to pay off their home and get a loan for 90 percent of its value. The government put the kibosh on that in 2010 amid fears of rising debt, financial instability, and an overheated housing market.

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What’s old is new. Despite near-record debt levels, policymakers think a 90 percent loan-to-value ratio is reasonable as well. Come January 15, 2025, they give back. But hold on to your mortgage applications – there is a twist.

To get it, you’ll need to buy auto insurance, and you need to spend money to build one or more second suits on your property. The maximum allowable property value, including new(s), is $2 million, and you can get up to 30 years of amortization.

For people who don’t have enough money to build a mortgage assistant that generates rental income, it can be a viable option. The refinance premium may be steep, but the borrower will get a lower insured interest rate, often 30 to 50 basis points cheaper than unsecured refinance rates.

Some questions remain unanswered, however:

• What are auto insurance premiums?
• Will lenders make borrowers pay for the construction of the second suite upfront or allow a deduction (partial cash back) while construction is underway?

It would be flattering if the government revealed all the details of the new mortgage programs at the announcement, but that might be asking too much. However, this policy is not very insulting. It’s not fanning the flames of demand, it’s adding much-needed housing, and history shows that total insured losses are about the same as getting a limited budget in Ottawa.

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I wonder how many people will bite in this plan, if you can’t get into foreign debts, and if the borrowers have to pay a lot of construction costs. Like watching a Netflix cliffhanger, we are left waiting for answers from the Ministry of Finance.

Robert McLister is a mortgage strategist, interest rate analyst and editor for MortgageLogic.news. You can follow him on X at @RobMcLister.

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