I notice that the local credit union, which used to offer prime minus 0.9% (equating to 2.1%) floating rate is now at prime minus 0.3% (2.7%).
The only conclusion that one can make is that retail credit is somewhat tightening and/or banks are getting concerned about their leverage linked to the real estate market. You wouldn’t see this in government debt rates – 1 year treasuries in Canada yield 0.90%. Five-year government bonds yield 1.35% and the best five-year mortgage rate you can find in Canada is about 3.19%.
Given the difference between the two (prime minus 0.3% versus 3.19% fixed), combined with the (albeit unlikely) potential for an interest rate spike would suggest that paying the half-percent spread for a five-year lock would be well-spent insurance money.
That said, anything around the 3% range is historically very, very, very low and would explain the high prices in the real estate market.
One other interesting thing to model is how real-estate prices would change after a few 0.25% rate hikes. Assuming that interest paid is in equivalence with rent or lower, a few small hikes would be quite traumatic for people that took out variable rate loans right about now.
It would be interesting to see the volume of houses being sold right about now.
I am pretty sure the banks do modelling of this on a regular basis.
With variable rate loans at such a low rate, the incremental interest hit is relatively higher, e.g. going from 3% to 3.25% is a lot more than going from 10 to 10.25%.