More Borrowers Turn Down Fixed Rates as Bond Yields Hit New Highs
It is becoming more expensive than ever to secure the security of a fixed rate mortgage – and increasingly, the best would-be borrowers now find themselves unqualified to even consider it as an option.
As bond yields hit new highs – the five-year government bond hit 3.09% on June 6, breaking a ten-year high – consumer lenders followed suit, raising the price of their fixed rate mortgage costs. A borrower taking out a five-year uninsured fixed mortgage with one of the big six lenders is now facing rates in the 5% range.
Factor in the 200 basis point hike required to pass the mortgage stress test, and today’s new mortgage borrower must now prove they can defer payments at 7% to qualify. (Under current guidelines, borrowers must either qualify at a rate 200 basis points above their contracted rate, or at 5.25%, whichever is higher.
READ: Getting a fixed rate mortgage? It will cost almost $800 more per month
“It’s quite breathtaking. People haven’t had to qualify at rates like this in 20 years,” wrote Robert McLister, mortgage rate analyst at Mortallogic.news, in a client note.
McLister says this means more borrowers are locked out of five-year fixed products altogether. Those who don’t pass the stress test and are unlucky to get a co-signer for their mortgage or access to cash are now being diverted to the variable product market; with five-year options still within the 3.2% range, this equates to a friendlier stress test of just 5.25%.
READ: What the BoC’s half-point hike means for borrowers
However, those who choose to save money with a variable rate won’t have that option for long, as McLister points out that the savings gap between the two types of rates is rapidly closing, currently falling to 86 basis points. base for insured borrowers (those who pay less than 20% down payment and must purchase mortgage loan insurance), and 109 for uninsured borrowers. That’s down from March’s 200 basis points, and if the Bank of Canada continues its aggressive hike mandate, it will soon disappear completely, leading to the phenomenon of floating rates matching or exceeding fixed rate options.
Other options for embattled borrowers include obtaining a leverage ratio exception from a bank – which only a small number of conventional prime borrowers would qualify for – or a non-OSFI compliant lender that currently offers lower rate.
According to McLister’s sources, the first two options are of concern to OSFI because they increase the risk profile of borrowers and, overall, the lending system.
Pressure is on the banking regulator to make a change
This brings new speculation as to whether OSFI may change its stress testing criteria, as its current threshold actively pushes borrowers into riskier borrowing products. In the comments made to Globe and Mail in May, Deputy Superintendent Ben Gully hinted at the possibility, saying, “If conditions change, we reserve the option of returning more frequently than once a year and that’s part of our approach and that’s indeed true of any guidance that we have at OSFI.
We are continually reviewing it, their applicability and, if conditions warrant, we would obviously drop out of the cycle to address them.
“When OSFI announced the stress test for uninsured mortgages in 2017, it probably never imagined the broad adoption of variable rates we would see this year, coupled with such an explosive move in the prime rate,” says McLister.
“But given that his job prepares for the worst, he should have foreseen these possibilities. Now, that’s partly to blame for less qualified borrowers choosing variable rates just to get approved. If inflation proves to be a greater threat than expected, OSFI could be responsible for the fact that adjustable rate borrowers have to bear rates well above the five-year fixed rates they would have have chosen.”
In the meantime, rate holds are the name of the game for borrowers looking to get into the market in the short term, as bond conditions are expected to deteriorate before they improve.
“We expect yields to peak relatively soon, likely in the coming months. With the entire upside cycle already priced in, the likelihood of a reversal increases, especially as we near the end of the cycle over the course of the year. quarters and the Fed is looking to slow down,” said CIBC FICC.
However, McLister points out, as five-year government bonds approach the 3% threshold, “not everything is priced in.” And, with the Bank of Canada set to raise its key overnight rate by 0.5% in July, with several more hikes to come to neutral or above, there is a lot of volatility to come for the obligation. market to react to.
Penelope Graham is the editor of STOREYS. She has over a decade of experience in real estate, mortgages and personal finance. His commentary on the housing market is featured frequently in national and local media, including BNN Bloomberg, CBC, The Toronto Star, National Post and The Globe and Mail.
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