Mortgage 101 – Mortgage Rates on the Move!

Dan Ahlstrand and Clinton Wilkins examined rising fixed mortgage rates, the growing pricing gap with variable rates, and uncertainty around the Bank of Canada’s next decision.

Dan Ahlstrand
Welcome back. It is yet another edition of Mortgage 101. I’m Dan Ahlstrand, and he, folks, is Clinton Wilkins. How are you?

Clinton Wilkins
I’m doing great. It is October, believe it or not. I feel like October crept up on us really quick, and September just kind of flew by. I don’t know if it’s just me getting older. I don’t know if it’s the seasons. But the one thing I noticed in September, and it’s normally hurricane season, is that I don’t think we had that many storms in September, which is good news here in Atlantic Canada. Yeah, I think it’s great. But here is a bit of a storm brewing, and even just before the show, I interviewed about what’s going on with the interest rate. So we’re just going to start hot right now.

Dan Ahlstrand
We’re going to hit this, the topic du jour, right off the top of the show today, Clinton. There’s a lot of stuff going on out there. We saw earlier this week that more American tariffs have come into effect. That’s impacting the Canadian economy. Mark Carney’s been warning us about tough times ahead. We’ve been out in the community. You and I have been going to a lot of events, talking to a lot of people about what’s happening in the industry, and it seems that the consensus is that there may be something coming when it comes to interest rates.

Clinton Wilkins
Yeah, I think there’s definitely something coming. I think it’s already really here. The fixed rates have increased. I’m just going to be very blatant about that; I would say even like today, they’ve increased over the last couple of weeks. Lenders have been increasing their fixed rates. And that being said, we’re seeing a big, big spread between where the fixed rates are and where the variable rates are, and more and more consumers are choosing to go into a variable rate because variable rates, by and large, are about 100 basis points, so about 1% less than what we would see in a fixed rate. That spread right now is more than what we’re normally used to seeing. Historically, consumers would always do better at a variable rate. Now, Dan, that hasn’t been the case maybe the last couple of years, especially when the Bank of Canada was pushing that rate up to slow inflation. But right now, we’re in a situation where variable is cheaper; many consumers are choosing to go to a variable rate, and I think they’re a little bit more comfortable. As much as we may see the Bank of Canada increase the key overnight rate in the future, depending on what happens with inflation, GDP, and job numbers, I think consumers are taking a little bit more solace now with the variable rate being lower and them taking on that assumed risk that the spread is giving them. If you’re 100 basis points lower, you have a little bit of margin and runway here to even be at parity with where the fixed rates are. And it’s not.

Dan Ahlstrand
Even just you and I say that. You and I were at an event a couple of weeks ago. It was a chamber of commerce event on housing, and I was lucky enough to sit at a head table with a lot of owners and realtors and financial people and people in the construction industry, and everybody kind of said the same thing. The question was asked at the table I was sitting at. If you’re going to get a new mortgage to refinance your mortgage, what do you look at? Do you look at a fixed rate because of all of the instability in the world, or do you look at a variable rate and roll the dice, so to speak? And the consensus, unanimous consensus at the table was to go variable.

Clinton Wilkins
That’s interesting. And what? This is really unprompted. Wasn’t sitting at the table, and Dan, you were there, kind of heading up this event. Interestingly, I hear that, and I say that because our consumers are saying the same thing, and these are not necessarily business owners, not necessarily the most savvy consumers. These are consumers that have typically been on a fixed rate before to say, “Hey, Clinton, we’re willing to go with a variable because of that pricing difference.” But I think also our consumers are more willing to take a variable rate because of the communication. The people that are listening to Mortgage 101, the people that are getting our social media updates, the people that are choosing to come on our live streams, our emails, our SMS-they’re becoming more and more educated, and they’re willing to take that risk.

Dan Ahlstrand
And the benefit of a variable rate is that if it does get to a point where you’re no longer comfortable, you can always switch it up, and the cost to break that mortgage is fairly inexpensive.

Clinton Wilkins
That’s true. Yeah, anybody who’s in a variable-rate mortgage can convert it to a fixed rate. Typically, when you do a conversion, the way that it would work is you need to convert at least for the amount of time that you have left. So, for example, let’s say you take a five-year variable, and in two years you decide that you want to lock in. You’d have to take at least a three-year fixed at that time, so that is an option. But I think you also hit the nail on the head. If you were to break that mortgage early, and by and large, a lot of consumers do decide to exit their term early. You can get out of that term with a penalty of only three months’ interest. So I think the flexibility of the variable, the variable being less, the option to convert- those are all reasons why I think consumers today are more willing to take a variable rate, and more so than I’ve, I would almost say, in my entire career, more and more consumers are taking that variable for sure.

Dan Ahlstrand
And we took a look at it last week on our last edition of Mortgage 101. And if you, by the way, want to go back, you can find those anywhere you can get your podcasts, and you can catch our back catalogue of shows. But we talked about it. The reason why the fixed rate field is kind of going up so much is that a lot of the debt lives in the bond market, and that bond market isn’t slowing any down anytime soon.

Clinton Wilkins
Yeah, the bond yields are definitely on fire. We’ll call it as much as we think the world’s on fire. Some days in that bond market, we’re watching it all the time. And I think leading up to September, the lenders were squeezed already. They were trying to keep the rates low. They were trying to earn market share. The year ends for these banks are typically the end of October, so they’re trying to get as many of these mortgages in as possible. So I think in some cases, mortgage lenders were selling mortgages basically at a negative margin. Which, as we know, you can’t do that forever. If you own a business, you have to make money. So they were trying to hold off, hold off, hold off, increasing the rates. Suddenly, they’re like, “Okay, we filled the bucket that we want. Now we’re going to start edging up, edging up, edging up. But as much as they started increasing the rates to balance out this negative margin issue, the bond market was basically on fire, and the cost of funds was just increasing, increasing, increasing. So we’re seeing lenders increasing their rates maybe almost every day, every week, every couple of weeks to try to stay on top of that margin issue, and at the end of the day, they have to turn those costs back over to you and me, the consumers. So it’s really important right now: if you have a mortgage that’s going to come up for renewal, if you’re going to refinance, or if you’re looking to buy a new property, get a rate hold. If you really want to fix a rate, get a rate hold. Get a pre-approval. Talk to your unbiased mortgage professional. I think that’s really, really important, and especially in an increasing rate environment, it’s more important than ever. Just don’t take what you’re given. Sometimes what you’re given is going to be better, depending on when that rate is booked. It’s going to be a timing game right now, and that’s where getting that advice is going to be super important.

Dan Ahlstrand
Whenever we talk about fixed and whenever we talk about variable, the question that everybody asks is, “What’s going to happen with interest rates moving forward?” I was lucky enough to be at a conference here in Halifax last week with the Bank of Canada Governor Tiff Macklem in town, and everybody was listening very intently to see if he was going to drop any kind of hints about what he plans to do or what the bank plans to do with variable interest rates. He was very coy about the whole thing. He didn’t say much at all.

Clinton Wilkins
Oh, I’m sure he’s very tight-lipped, and these economists, what they say can actually move the market. So I think he’s obviously thinking about that, and I think that he doesn’t know, to be honest, when they go and make these rate decisions, they go on a lockup. Those decisions are literally made on that day. They’re looking at hundreds of different data points. All these economists are sitting together, and then they make a decision. Really, at the end of the day, it is wild. And I think sometimes the market knows, and the economists can project, and they almost decide in advance. And usually, they’re pretty close, but the actual decision is not made until that day, and they go into a lockup before they give us the news. So we’re in the Atlantic time zone. The announcement comes out at 10:45 a.m. on the day the Bank of America meets. But oftentimes the markets will price in what the economists are already thinking leading up to that point, and I think the economists, by and large, are usually pretty close. And I think they survey something like 20 or so economists, and I’ve seen them before where they’re almost making their predictions. Some say, okay, no change. Some say, okay, we’re looking at 50 basis points before the end of 2027, and that’s changing all the time, because every time the GDP numbers come out, every time the inflation numbers come out, they’re changing those decisions, and they’re looking at all these different data points. And I think from like an inflation standpoint, Dan, you did a live stream here a couple of weeks ago, I guess, right? And inflation, by and large, I think is relatively stable. It’s being driven obviously by the cost of fuel, but inflation, specifically in Nova Scotia and New Brunswick, is some of the highest in the country, which is crazy.

Dan Ahlstrand
It is crazy. All right, Clinton, we’ll put you on the spot. What do you think is going to happen at the end of October?

Clinton Wilkins
I think we’re still going to have a hold. There’s so much uncertainty. What’s going to happen with the U.S. could really shift between now and then. Maybe we’ll have, like, a deal together, and then suddenly things will get better. But what I’ve read and what I’ve understood from the economists and their projections is that, even if there is a deal, the lagging indicators are like four months, six months in the future. So some of the damage has already been done, and it’s going to take some time for these things to write themselves off. Obviously, fuel is a huge concern, especially around that cost. I was in BC last week for meetings with one of our major partners, and we were driving by, and the regular fuel was like $2.10, which is just wild. So we can see, obviously, there’s been a lot of different pricing from across the country. But fuel cost is a huge, huge concern, and as we know, we need fuel to move our goods around. And we’re in one of these markets where we’re bringing a lot of goods in, and people are trucking and bringing goods to us, and we’re moving the goods out. So obviously, that has an impact.

Dan Ahlstrand
Bank of Canada governor, when he was in town, also focusing on productivity and focusing on Atlantic Canada, with some opportunities coming with the defence announcements with the proposal for all that energy. So I think there’s going to be a lot of eyes on the Bank of Canada when they make their decision at the end of the month.

Clinton Wilkins
I think there are a lot of eyes all the time. One unique thing with Dan and us: we were doing a live stream every time the Bank of Canada meets, which is great. We push out all that information. We can give our perspective because I think that perspective changes depending on the information that we have. I’m not an economist. I’ll call it as much as I’ve used this before. I say I’m like a bar stool economist. We’re giving our perspective. We’re letting our consumers know what’s going on, and I think some people look to us for that advice. When we come back, Dan, I want to touch on the rents here in Halifax and Atlantic Canada. Certainly a concern, and that’s something that we’ll talk about when we come back.

Dan Ahlstrand
We’re going to take a break. You’re listening to Mortgage 101.