Mortgage rates have nowhere to go but up

Garry Marr Mar 27, 2012 – 7:22 PM ET | Last Updated: Mar 27, 2012 7:33 PM ET

The logic is pretty simple. You hit rock bottom and there is no where else to go but up.

Mortgage rates on terms of five years and 10 years have never been this low. You can go back 50 years and not find a rate of 2.99% from one of the major banks for a fixed-rate product for five years. The 10-year, an almost unheard of length for most Canadians to commit to, has touched down at below 4%.

Even sticking it out with a variable-rate product linked to the prime lending rate still looks pretty good with most major financial institutions offering some type of discount off their 3% floating rate.

Already there are signs rates could be on the increase. The bond market — which mortgage rates are based on — has been rising fast and the big banks say their most recent specials will come to an end this week. But even with a 50 basis point increase, a five-year fixed closed mortgage of 3.5% is almost unheard of historically.

“Everybody is looking at the bottom here and thinking, ‘When are rates going to go up?’” says Kelvin Mangaroo, president of RateSupermarket.ca which produces a monthly forecast from leaders in the mortgage industry.

Even among the experts, few foresaw this price war in the mortgage sector. “With the big banks getting very aggressive again, it took a lot of people by surprise,” said Mr. Mangaroo. “I think people were thinking the status quo would hold for a while.”

He says the last Bank of Canada announcement about the economy had people thinking at some point the overnight lending rate, which impacts the prime lending rate, would go up, but not this year.

“Now that people are thinking of early 2013, that has people talking but really that is just so far out says Mr. Mangaroo. “It’s really just an abstract concept at this point.”

Craig Alexander, chief economist with Toronto-Dominion Bank, says he can understand how there might be some fatigue from consumers hearing about rising rates.

“Unfortunately, we have been saying for years ‘that’s it, rates can’t go any lower than they are today’ and then they are [lower] 12 months later,” Mr. Alexander says.

But this time out, he says, it almost seems impossible that rates on a five-year closed mortgage could go lower than the current 3%. “Short of the Canadian economy going into a recession and causing the Bank of Canada to cut rates back to their all-time low, there really isn’t an environment that would lead to significantly lower mortgage rates,” Mr. Alexander says. “The downside here is extraordinarily limited.”