Last updated February 4, 2019
As expected, the Bank Rate remained unchanged on Wednesday, March 6. None of the major banks had expected the Bank of Canada to raise rates. Recent economic data shows the Canadian economy shrank in December and barely grew in the last three months of 2018. It appears the housing slowdown has been a drag on economic growth. The next rate announcement will be April 26th.
This relationship is intriguing since realtors often say house prices will grow because of economic growth but the reverse has happened. House prices have risen beyond what people can buy and the drop in purchases is actually causing economic growth to stall, which could exacerbate home price weakness causing a downward spiral until home prices reach affordable levels.
Once rate increases resume, the next increase in the Bank Rate to 2% will still be 0.5% short of what would be considered a normal or neutral interest rate range for good economic times. “Governing Council continues to judge that the policy interest rate will need to rise over time into a neutral range to achieve the inflation target,” the Bank of Canada said on January 9th. In other words, unless there’s a recession, you can expect at least two or three more rate increases.
Keep reading for a quarterly analysis of interest rate forecasts provided by leading financial institutions in Canada and translated these into mortgage rate forecasts. I've provided a forecast to the end of 2020 to help you decide whether to lock in your mortgage rate or leave it floating.
Overall, there's an upward trend in rates with little debate over how large the rise will be in the next 6 months and but there is more uncertainty in the long run. Most economists anticipate a quarter point increase in the Bank Rate in mid-2019 (They used to predict it would happen in early-2019 but the economy is looking soft). You’ll hear the media make a big deal out of whether the Bank of Canada will raise rates again in May or July however focusing on a two month timing difference is too short-sighted for people negotiating a mortgage renewal.
Variable and adjustable mortgage rates are tied to the Bank Rate (the rate at which banks can borrow from the Bank of Canada).
By the end of 2020, a majority of economists expect at least three more rate increases to 2.25%, and Scotiabank expects the bank rate may reach 3.00% in 2021. The Bank Rate was 4.00% in 2007 so the forecast rates are not outside the normal range long term range.
The Prime Rate will increases with the Bank Rate, so it is possible variable and adjustable mortgage rates could rise 0.50% to 0.75% by the end of 2020. If this worries you, then consider a fixed rate mortgage.
The big news here is that economists at Royal Bank, Desjardins, and National Bank (solid lines on the chart below) expect rates to drop toward the end 2020, which would be an appropriate response to a recession. In a previous forecast RBC showed this downward prediction, they subsequently reversed it, and now are have reinstated their original prediction that 5 year rates will drop in 2020.
Fears of a recession are nothing new and a recent TD Canada Trust report explores the topic. Another report from TD looks at the likelihood of a recession using their Financial Stress Indicator (FSI). What’s fascinating about this chart is the range between 2007 and 2008 during the financial crisis. Look how little warning the FSI provided. It shot up dramatically within 6 months and by then it was too late. The years leading up to the financial crisis where less volatile than the the past 3 years. So the FSI in an interesting piece of information but don’t think of it as an early warning system.
In truth, a recession is likely inevitable but the timing is devilishly tricky.
What you can take away from these forecasts is that rates will likely be the same or higher than today but they are unlikely to drop lower than today’s rates unless there's a recession.
Looking at house prices, both higher rates and a recession would but downward pressure on prices so expect housing headwinds for the news couple of years.
Based on these forecasts, you can see that locking in today’s 3.6% 5-year mortgage rate will start benefiting you in 2020 if variable rates climb to 4.20%.
If you are inclined toward a fixed rate mortgage, our advice is to speak to a Mortgage Broker as early as possible to lock in a rate. You can lock in a rate up to 120 days before closing on a home sale or the renewal of your mortgage.
|Rate||Dec 2017||Dec 2018||Today Mar 2019||Dec 2019||Dec 2020|
|5 Year Variable Mortgage Rate||2.30%||3.05%||3.15%||3.40%||3.65%|
|5 Year Fixed Mortgage Rate||3.25%||3.60%||3.60%||4.00%||4.00%|
Lock in a 5-year fixed rate?
Buy a home now or wait for the next cycle
The average forecaster predicts variable rates will rise another 0.50% over the next two years. Some predict further rate increases in 2021 while others predict a recession will lead to a drop in rates. There is a lot of uncertainty.
Given the uncertainty these days there is no right answer when you choose between locking in or taking a variable rate mortgage. If you choose to lock-in, you will be in good company because Mortgage Professionals of Canada says 68% of homeowners in 2018 had a fixed-rate mortgage.
However, if you believe you may want to sell your home or move in the next few years, then locking in a rate can result in a large penalty fee if you cancel the mortgage before the full term is completed. The fee can be quite large, so keep this in mind when deciding to lock in an interest rate.
If you are planning to buy in the next 3 years, keep in mind that rising rates reduce the amount of mortgage financing a bank can offer you and this will erode your home buying budget. This effect was amplified by the addition of the qualification stress tests in January 2018. The silver lining is that it reduces home buying budgets for all home buyers and this will out downward pressure on home prices.
Also, home prices in many markets in Western Canada have been dropping since the middle of 2018 and this means you shouldn’t feel pressured rush into the market. Be patient and don’t pay more than the list price (just because they ask for that much doesn’t mean it’s the market value).
If you’re not ready to buy a home, you can wait until rates begin to drop again but there is no guarantee the Bank Rate will ever be as low as 0.25% (ie., 2010) again. The previous all-time low was in 1950 when it dropped to 1.5% which is close to the rate we have today. For context, during WWII, when food was rationed, the Bank Rate was 2.5%.
To get access to experts who know what every lender is doing, consult a mortgage broker. They have the broadest number of options to find you suitable financing.
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