You're paying today for inflation that hasn't arrived
If you've got a pre-approval in hand or you're shopping this week, you already know fixed rates kept climbing. The best five-year fixed for an insured mortgage sits at 4.34% right now. The anything-under-4% deals are gone.
Here's the part that doesn't line up. Inflation is bumping along near 2%. Wage growth hit 2.0% in August, the slowest pace in nine years. The economy didn't grow at all in July. None of that is the picture of an overheating economy.
So why are fixed rates moving up? Because oil is parked near $100 a barrel thanks to the Iran war, and lenders have decided expensive energy will eventually leak into the price of everything else. Freight. Groceries. Heating. They're betting on that future, and fixed rates are priced off that bet.
The five-year bond yields that lenders use for price fixed rates jumped hard in just five days, and lenders raised rates right along with it.
The economy isn't cooperating with the fear story
For high oil to turn into runaway inflation, workers usually have to get bigger paycheques to keep up. That's not happening. Wage growth slid from 3.3% in June to 2.8% in July to 2.0% in August.
There's more working against the fear case. When gas costs more, families spend less on everything else. Expensive energy acts like a tax that cools the economy rather than heating it up. And businesses are sitting on unusually fat profits right now, so most of them are quietly eating higher costs instead of passing them to you.
Put simply, the real economy is soft and the inflation everyone's afraid of hasn't materialized. If you're weighing a fixed rate today, you're paying for a scenario that may never arrive.
October 28th decides whether your variable rate finally moves
The Bank of Canada left its rate at 2.25% back in September, so nothing changed for anyone on a variable or a line of credit.
That gap between fixed and variable is now unusually wide. About 4.34% fixed versus 3.5% variable on the same insured mortgage. That's a real chunk of monthly breathing room for taking on a bit of uncertainty.
The next Bank decision is on October 28th, and honestly, it's a coin flip. The people setting rates are betting on roughly even odds of a hike. If the Bank hikes, your variable rate moves up for the first time in a while. If it holds, the whole five-hikes-are-coming story starts to look overcooked, and some of the fear priced into fixed rates could unwind.
For you, that means the fixed-versus-variable call isn't a math test right now. It's a nerves test. Fixed buys you certainty and costs you more today. Variable is cheaper today and bets, like I do, that the hike story is overstated. Pick the payment you can forget about.
My take
My read: lenders have front-run an inflation problem that hasn't shown up. Wages at a nine-year low, a flat economy, and businesses eating their own cost increases. That's not the setup for the runaway inflation the people setting rates are betting five rate hikes against. I think that's an overshoot, and I think some of what's sitting in today's fixed rates comes back out once the Bank fails to validate it. So where do I land? If it were my money, variable still has the best shot at winning over a full five years, even though I completely get why most people are choosing fixed right now. I could be wrong if oil stays high long enough to finally crack into wages. That's the one thing I'm watching.
Insider tip
If you've got an accepted offer this week, and you're putting more than 20% down, tell your lender to order the appraisal the day the offer firms up, not after your inspection. With rates jumping, lenders are re-quoting fast, and the appraisal is the slowest moving piece. It's what eats your financing condition and puts your rate hold at risk if it drags.
Go deeper: Mortgage Appraisals: Everything You Need to Know (But Were Afraid to Ask)
