Spread surpasses 100 basis points

The Bank of Canada will make an interest rate announcement tomorrow

By Neil Sharma

29 May 2018

The spread between fixed and variable rates has climbed over 100 basis points for the first time since December 2011, and according to Ratehub.ca’s co-founder, it’s clear which of the two borrowers should consider.

“It means that the increased risk of a variable rate should be seriously considered because the consumer can save so much money, at least in the early stages of the mortgage, and if the prime stays low in the later part, the savings will continue for the whole duration of the mortgage,” said James Laird.

“The Bank of Canada would have to increase prime four times for today's variable rates to be equal to today's fixed rates. With most experts predicting a maximum of two additional prime rate increases for the remainder of 2018, it is likely that variable rates will be the better choice for Canadians this year."

Given the consistently positive news about Canada’s economy, the expectation is rates will climb. Laird says that everything from the price of oil to job creation has been reported with optimism, but the same cannot be said for the real estate market.

That might be good news for those anxious about tomorrow’s interest rate announcement by the Bank of Canada.

“It’s hard to see it go up [tomorrow] when most real estate markets in Canada are not better than they were a few months ago, so I find it hard to believe they’ll raise the rates,” said Chris Allard, a broker with DLC Smart Debt. “But at the end of the day, when they raise the prime rate, it’s about more than what’s happening in the real estate market. Most of it has to do with how the global markets are doing and how it’s going to impact foreign companies buying Canadian products.”

The remainder of the year is another story, though.

“The Bank of Canada is going to weigh all these factors in 2018,” said Laird. “Where I personally stand is the economic news in Canada is strong enough to warrant one more prime increase, possibly two, but I wouldn’t expect more than that this year.”

The fixed rate is essentially moving back to where it was in 2014, but it’s occurring at a time when Big Six banks are trying to out-do each other’s variable rate discounts.

For Example, TD Bank rolled out an aggressive discount that runs till the end of the month, however, the bank merely matched Bank of Montreal’s offering, which some observers called the biggest ever variable discount by a chartered bank.

“Fixed rates are reaching a four-year high right now, and at the same time, the discounts being offered on variables have gotten very aggressive,” continued Laird. “The spread between the two is the widest it’s been since 2011.”