Fixed mortgage rates back on the rise

Steve Huebl

Interest Rates

February 27, 2023

Fixed mortgage rates in Canada surged last week thanks to a fresh run-up in bond yields.

Five-year Government of Canada bond yields rose to nearly 3.60% after falling below 3.00% earlier this month.

The catalyst is primarily fresh concerns about hotter-than-expected inflation readings south of the border.

“Much of the move is based on the U.S. inflation numbers coming in hot,” explained Ryan Sims, a mortgage broker with TMG The Mortgage Group and former investment banker.

“But people need to remember that Canada and the U.S. are different countries,” he added, noting that inflation continues to trend downward here in Canada. “The BoC and the Fed do not have to move together, and I think this year we will see the Fed and BoC move in different directions.”

Sims added that some of the increases could also be due to potential risk premiums being added to Canadian bonds.

“Remember that if investors think Canada is in worse fiscal shape, they add a premium to the yield they demand to compensate them for their implied risk,” he told CMT. “If that takes hold, [BoC Governor] Tiff [Macklem] could lose what little control the BOC has over the Canadian longer-term bonds, and we could be in a real problem with higher rates leading to worse economics, leading to higher inflation, leading to worse economics, and round and round we go.”

Following the rise in bond yields, the lowest uninsured 5-year fixed mortgage rates rose about 0.25%, returning back above the 5% threshold, according to data from MortgageLogic.new. The lowest nationally available insured rates (those with a down payment of less than 20%), meanwhile, rose about 0.15% during the week.

Observers suggest further rate volatility is likely as the market receives contradictory economic data.

“Even with recession fears mounting, current economic data continues to show surprising strength,” Ben Rabidoux of Edge Realty Analytics wrote in his latest Housing and Mortgage Market Report for Mortgage Professionals Canada. He pointed to the two most recent jobs reports from Statistics Canada, which surprised markets with “stunningly high” job growth well above expectations.

“Market participants are clearly unsure of how to price in these confusing cross-currents,” he noted.

“Even with some upward pressure on fixed rates in the coming weeks, I still expect a modest rebound in home sales heading into the spring,” Rabidoux added. “The Bank of Canada has clearly signalled that they will pause and assess the impacts of higher interest rates on Canadian consumers and businesses. Those impacts hit with a long lag, and we may not know how the economy responds until later this year.”

Home Capital reports Q4 earnings

Alternative lender Home Capital reported a 52% decline in net income in the fourth quarter against a background of higher interest rates and volatile economic conditions.

Looking at its full-year 2022 performance, Home reported a 39% drop in net income, however it saw originations rise by 6.8% to $9.5 billion and total loans under administration increased 12.8% to over $27 billion.

“Home Capital executed well in a volatile year for the mortgage industry,” President and CEO Yousry Bissada said in a release. “In spite of the challenges of rapidly rising interest rates, we delivered 7% growth in originations and 13% growth in total assets.”

2022 earnings highlights

• Net income: $150.2 million (-39% year-over-year)

• Total originations: $9.5 billion (+6.8%)

• Single-family originations: $7.35 billion (-1.3%)

• Loans under administration: $27.25 billion (+12.8% YoY)

• Net interest margin: 2.01% (vs. 2.56% in 2021)

• Net non-performing loans as a % of gross loans: 022% (vs. 0.13% in 2021)

Home Capital didn’t hold a conference call this quarter due to shareholders voting on Feb. 8 to accept the bid by Smith Financial Corporation. Under the terms of the deal, which isn’t expected to close until mid-2023, Smith Financial Corporation would acquire Home Capital at a purchase price of $44 per share, valuing the company at $1.7 billion.

“Shareholders voted overwhelmingly in favour of the proposed plan of arrangement between Home Capital Group and Smith Financial Corporation,” Bissada said. “We thank our shareholders for their support for more than 36 years. The team at Home is looking forward, subject to regulatory approval, to closing our plan of arrangement with Smith Financial Corporation and continuing to build our business and serve our customers.”

Mortgage quotes on the rise: RATESDOTCA

With the traditionally busy spring homebuying season now in sight, it seems many buyers are looking to get a jump on their purchases.

Rate comparison website RATESDOTCA is reporting a 92% year-over-year jump in total mortgage quotes for purchases, while quotes for renewals are up 107% for both primary and investment properties.

Based on the quotes, it found fixed mortgage rates are being favoured over variable-rate mortgages, while down payment amounts have fallen.

“While a month-over-month spike is to be expected after a slow season of home sales, what’s more telling is the rise in mortgage quotes our data show, year-over-year,” the site noted in a report. “For mortgage quotes to surpass that of early 2022, when the market was still hot, indicates a new wave of interested buyers.”

The rising interest in renewal quotes isn’t surprising, the site noted, given that rates are higher than they were four or five years ago, “incentivizing Canadians to shop around for better deals.”

RATESDOTCA’s mortgage quoter data also found fixed-rate quotes have been about 75% higher than variable-rate quotes over the past four months. Compared to last year, interest in fixed rates is up 121%, the report added.

It also found down payment amounts were down about 7% in January compared to a year earlier.

“This could be partially due to the fall in home prices,” the report noted. “As home prices fall below the $1 million mark, particularly in expensive cities like Toronto and Vancouver, buyers can choose to put less than 20% down (and opt for an insured mortgage), which often allows for lower interest rates than an uninsured mortgage.”