Interest Rate Spread Widening?

Recent increase in the bond yields and the spreads between shorter (1 and 2 years) and the longer term (5, 7 and 10 years) bond yields in the US and Canada may signal the return to a more normal rate differentials. Historically, the spread between the shorter 1 and 2-year mortgages and longer term 4 and 5-year mortgages was between 05% to 0.75%(from 2002 to beginning of 2005). The Canadian mortgage posted rates from 1 to 5 years narrowed and were relatively flat for the past 18 months.

Recently, Canadian Banks were found to be discounting more aggressively on their 1-year fixed rate mortgage. A Prime home borrowers can now get a 1 year fixed mortgage at 4.99% compared to around 6.00% just 3 months ago. The spread now between 1-year and 5-year fixed mortgage is around 0.5%.

Canadian Banks have been discounting between 1% to 1.5% for their 5-year fixed term mortgages to their prime borrowers. The posted rates from 1 to 5 years for the past 2 years were comparatively flat hovering around 7.0%. The widening in the posted rates has a significant impact for home owners who prefer to get a variable term mortgage now with the intention to lock-in on a later date when interest rates are heading up.

Variable or fixed rate mortgage?

When most banks are offering Prime (presently at 4.75%) less 0.6% or 0.7% for a floating rate mortgage around 4.05% to 4.15%, many home owners are attracted to floating rate mortgages. But, few may be prepared or aware that when they lock-in later, they will be paying be locking-in at rates that are not as attractive.