What is going to happen to fixed Rates?
Many people ask, what will happen to fixed rates with inflation rising. Fair question since most people talk solely about short term or variable rates lately. I will stick my neck out. First we need to understand how fixed rates are priced, let’s review from a previous post…If prices for bonds drop (which they have been doing) than yields go up – make it more attractive for people to buy at lower prices. If yields go up and mortgage lenders price off bonds that would suggest that prices have to go up (mortgage rates) as well. It is hard to say now how much yields have to increase to lead to mortgage rates increasing as spreads are at new historical amounts.Inflation pressures will cause yields to go up (likely by more in the short than long term). My guess (and it is only a guess) is that if inflation pressures remain, BoC will have to increase prime rate 100-150 bps in the next 12-18 months. Longer term rates may only rise by half that amount. There is a caveat to all this and that is spreads for interest rates continue to be at astronomical amounts compared to history, so as pressure mounts to increase rates to maintain the current spreads, some lenders in a competitive move may accept lower spreads to keep their rates lower and bring in more business. Ultimately i think that is somewhat unlikely, because lenders know that when they have a rate that is significantly lower then the market they get so swamped with business that they normally can not handle the additional demand. Ultimately again I would count on rising fixed rates…
