There’s a little bit of good news out there for Canada’s increasingly stressed-out homebuyers: The pressure from rising mortgage rates is ramping down, at least a little.
In the latest sign, HSBC has cut its rate on a fixed, 10-year mortgage to 3.24 per cent, while two smaller lenders — Intellimortgage and Butler Mortgage — are offering 3.22 per cent.
According to comparison site RateSpy, these are the lowest rates for that type of mortgage on record.
Not only is @HSBC_CA's new 10yr fixed rate the lowest 10yr ever advertised by a lender—according to our records—but remarkably, it's just 40 bps above the lowest nationally available conventional variable. Talk about a flattening rate curve… https://t.co/k0vnYJztFk
— RateSpy.com 🇨🇦 (@RateSpy) May 16, 2019
Ten-year mortgages were never popular in Canada because they typically came with a much higher rate, often as much as 2 percentage points above the super-popular five-year fixed-rate loan.
But that’s changing. Mortgage rates are based in large part on the interest rates in bond markets, and bond markets are currently experiencing “yield compression.” The difference between long-term interest rates and short-term interest rates is shrinking, or even disappearing.
“There’s little difference between the five-year rate and the 10-year rate, in terms of the cost for us to borrow, and we can pass that on to the customer,” said Barry Gollom, senior vice president at HSBC Canada.
In some cases, rates on 10-year mortgages are now only 0.3 percentage points more than on five-year mortgages, noted Sherry Cooper, chief economist at Dominion Lending Centres.
For many people, paying that extra bit may be worth the peace of mind knowing they are protected from interest rate hikes for a whole decade.
“It makes more sense to lock in than ever before if you are highly risk-averse,” Cooper wrote in an email to HuffPost Canada.
But these mortgages still may not make sense for many Canadians, who on average hold on to a mortgage for just 33 months, she added.
And Cooper doesn’t see mortgage rates rising sharply in the next 10 years, so any benefit from locking in a rate today is likely to be minor.
Mortgage ‘payment shock’ vanishes
Falling mortgage rates mean Canadians renewing their home loans this year won’t face a mortgage shock, as many observers had feared just several months ago.
The typical borrower renewing this year will see their mortgage rate rise by just 0.2 percentage points, National Bank Financial (NBF) said in a report this week.
“As a result, the potential payment shock for homeowners set to renew their mortgage this year has almost vanished,” senior economist Matthieu Arseneau wrote.
NBF’s measure of housing affordability showed improvement in the first quarter of this year, the first time housing in Canada became more affordable in seven quarters.
Possibly for the first time in years, house prices are growing more slowly than incomes, with NBF’s house price index rising 0.3 per cent in the first quarter of 2019, while incomes grew one per cent.
Vancouver saw the largest increase in affordability, thanks to falling house prices, but the market still remains near its worst affordability levels in 40 years.
Toronto, where the housing market is showing signs of a rebound, saw affordability worsen in the quarter.