Fixed Rates Increase and Create the Biggest Fixed-Prime Spread in 30 Years

Well, the smoke has finally cleared after the fixed rate increases from last week. The biggest single-day jump in fixed rates in 14 years created record volumes at lenders as borrowers rushed to get applications and pre-approvals in before the hikes took effect. What also resulted from the increase is the biggest Fixed-Prime spread in 30 years. The spread (difference) between discounted 5-year fixed and 5-year variable mortgage rates is currently about 240 basis points.

Based on estimates (there is no record of historical pricing on discounted fixed and variable rates), that is one of the biggest spreads in a very long time. The only historical data that is kept is the between the posted 5-year fixed rate to prime rate, the spread between the two right now is 360 bps.

That’s the biggest spread in the last 30 years (based on monthly data from the Bank of Canada).

Technically, today’s posted Fixed-Prime spread is tied with the 360 bps reading we saw last summer. The difference is that variable rate discounts last summer were nowhere near the P - 0.50% we have today.

To put it another way, today's plump Fixed-Prime spread indicates what many already know: fixed rates are selling for a major premium over riskier variable rates...or is it that variables are selling at an extremely deep discount? It is likely the spread will close when the Bank of Canada starts increasing its Overnight Rate early in the summer as is widely anticipated. Some analysts are expecting the Overnight Rate to increase from 0.25% now, to 1.25% by the end of the year. Even with that “big” of an increase, variable rates still stand to be below 3% compared to the discounted 4.35% 5-yr fixed rates that are available now.

This is meant to be some food for thought rather than predictive but consider this; if you look back to 1980 for cases where there’s been a 2%+ fixed-prime spread, prime rate has never averaged more than 1.75% higher in the five years that followed.

Will 2010-2015 be the first such instance? Time will tell. But one thing’s for certain, today’s fixed rates are trading with a huge built-in “insurance premium,” and the 2.40 percentage point edge gives variables a big head start as we move into the next rate hike cycle.