Your renewal letter just got more expensive

The letter that arrives in November

Say your five-year term ends in February. Your lender sends the renewal letter 120 days early, so it shows up in November. The rate on that letter is whatever the lender is charging the day they print it.

Last week, lenders raised fixed rates. Not by a lot. Enough that if your letter went out Monday versus Friday, the difference is real.

The part that's harder to explain: the benchmark lenders use (bond yields) to set those rates dropped this week. The five-year rate fell to 3.53%. That's the fastest move down in two months. Lenders had room to ease off. They decided not to.

Oil is still the problem

In the U.S., the Fed raised its rate a quarter-percent last week. The reason was short: inflation is up, and oil is expensive. When crude climbs, it doesn't stay at the pump. It eventually shows up in freight, groceries, heating costs. The Fed hiked to stop that from spreading.

Canadian lenders are doing the same math. Crude is climbing toward $100+ a barrel. Lenders are continuing to raise fixed rates because they think the risk is real.

I'm not convinced we see BOC hikes this year. The drag from trade uncertainty will probably outlast the oil spike. But the people setting rates today aren't waiting to find out.

If you have a variable rate, nothing moved this week

Fixed rates move when it costs lenders more to borrow for five years. Variable rates and lines of credit move when the Bank of Canada moves prime.

So if you have a variable rate, your payment is flat until then. Wondering if you should look at switching to a fixed rate? The spread between the lowest variable and fixed rate is approximately 75bps, so the BOC would need to increase rates a quarter percent, three times in order to make the change worth while.

The market thinks inflation wins. I think the trade drag lasts longer.

Borrowers renewing in the next eight months should call their lender this week for an early-renewal quote

If your term ends in the next eight months, call your lender this week and ask for an early-renewal quote. Most banks will hold it for 30 days.

That gives you a floor. If rates climb between now and your renewal, you're covered. If they drop, you walk away and take the lower rate when the time comes.

It's free insurance. And if the quote they give you isn't competitive, that's when you call me.

My take

I still think variable rates have the best chance to save you money over five years. I know that's a contrarian call right now. Fixed rates offer certainty, and I'm not trying to talk anyone out of that. But the market is thinking four Bank of Canada hikes by the end of next year, and I don't see it. Canadian inflation is cooler than US inflation. The trade drag is real. When those disinflationary effects outlast the oil spike, and I think they will, the Bank will have room to ease, not tighten. If I'm wrong, you pay more for a year or two. If I'm right, you save for five.

Insider tip

If your renewal lands in the next eight months, ask your current lender for an early-renewal quote this week. Most banks will hold the offer for 30 days. If rates climb, you're covered. If they drop, you walk away and take the lower rate at renewal. It's free insurance.

Go deeper: How a Mortgage Pre-Approval Can Protect You from Rising Rates