What's next for mortgage rates?

Richard Earles is a mortgage broker and owner of DLC Valley Financial Specialists

Date24.01.2024
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INTRODUCTION
Annnnnnnnd.....nothing happened at the Bank of Canada rate announcement today (January 24th, 2023). It's not a big surprise to anyone right now that the Bank of Canada held their policy interest rate at 5%. In their fourth pause in row, the bank is cautiously treading water until they can see a meaningful reduction in inflation or need to react to a black swan event similar to the Covid 19 pandemic.

The fixed rate slip and slide.

Every bank economist in Canada is forecasting a reduction in interest rates, with some forecasting as much as six rate cuts by the summer of 2025. There is no hiding that there is a negative trend in the five and 10 year Canada bond which is directly bringing fixed interest rates down from their peak just six months ago. With this obvious macrotrend, we can't help but feel like a Bank of Canada rate cut is on the horizon in the near future. Fixed rates themselves in the last 90 days have dropped by 1.14% from 6.24% to 5.10%, which is a lot in mortgage land.

Variable rates are still ugly, but they might look better soon.

People with variable rate mortgages have certainly been tested in the last 24 months. Variable rates have skyrocketed from a floor rate of 1.2% all the way to ~6.90% and that comes with a big jump in interest costs in a short period of time. Despite the fixed rate reductions that we're seeing due to the Canada bond market, variable rate holders are begging for relief from the Bank of Canada, as variable rate mortgages and home equity lines of credit are based on the bank's prime rate. If the prime rate goes up, so does the interest rate and cost.

What’s the popular mortgage term, given the volatility?

People are shying away from five year fixed terms, which is traditionally the most popular fixed term for Canadians. Since the sentiment is suggesting a drop in Bank of Canada rates in the next 12 months, a lot of people are considering two year and three year fixed terms as opposed to the five year fixed or variable. The people that we work at DLC Valley Financial Specialists with are locking in to a shorter fixed rate, but everyone is now starting to discuss variables as they might soon be the best suited term if we start seeing further reductions by the Bank of Canada.

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