Most economists are forecasting that the Bank Rate will remain unchanged for at least 1 year. From our perspective, this is unlikely. Reading between the lines, Mortgage Sandbox believes these economists are reacting to expected economic uncertainty. In other words they figure it’s a 50/50 change between the economy doing better or hitting a recession. If the economy does well then rates rise but if it hits a recession rates drop. Since they don’t know what’s going to happen, they’ve split the difference and predicted everything will remain unchanged.
This article will examine the forecasts for floating variable rates and 5-year fixed rates. Keep reading to learn what the big banks are saying about rates.
The Bank Rate has been unchanged at 1.75% since October 2018 and is broadly expected to stay unchanged on the next interest rate announcement date May 29th. There are two bank economists predicting the rate increase will resume on December 4th, after the federal election.
Now is a good time to look back one year at what the banks thought would be happening today. A year ago, most economists expected the bank rate to be between 2.0% and 2.5%. They were incorrect by a quarter to three quarters of a percent. That difference sounds small but could mean having a monthly mortgage payment that is 20% higher! The key takeaway is that forecasts are educated guesses and are rarely accurate. Last year’s forecasts did correctly anticipate three rate hikes last year, but they didn’t anticipate an economic cooldown that would put a pause on rate hikes.
None of the major banks had expect the Bank of Canada to raise rates until the end of the year, immediately after the federal election. Generally, central banks try not to make any controversial policy rate moves in the months leading up to an election. As well, 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. Economic news from April has been a mixed bag which does nothing to provide certainty for Canadians.
An interesting observation is the explanation that a housing slowdown causes the economy to stutter. I point this out because realtors often say house prices will continue to grow because of economic growth but the reverse has happened. House prices in Vancouver and Toronto began to drop in conditions with strong economic growth and the drop in real estate prices has hurt the economy. One theory is that house prices have risen beyond what people can buy and no amount of economic growth or new middle-class jobs will help Canadians afford million-dollar homes. In any case, fewer home purchases is causing economic growth to stall, and this could exacerbate home price weakness causing a downward spiral.
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, eventually rates will continue to rise.
Keep reading for a quarterly analysis of interest rate forecasts provided by leading financial institutions in Canada which are 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 but there is more uncertainty in the long run. Most economists anticipate a quarter point increase in the Bank Rate in late-2019. You’ll hear the media make a big deal out of whether the Bank of Canada will raise rates again in May or September; however, focusing on a few months timing difference is too short-sighted for people negotiating a mortgage renewal and committing to 5 more years with a lender.
Variable and adjustable mortgage rates are tied to the Bank Rate (the rate at which banks can borrow from the Bank of Canada).
The current forecast is positively boring. All the banks are falling in line and predicting no change. With all the economic uncertainty in the news, this likely means that they predict a 50/50 chance of rates rising or falling in the near term, so they’ve split the difference. Desjardins, recently said, “uncertainties are rife both here at home and internationally, especially as Canada continues to adjust to higher interest rates.” The Bank of Canada “could very well have to wait until summer 2020 before ordering fresh key rate hikes.”
By the end of 2020, a majority of economists expect rates will remain unchanged and this seems very unlikely. Scotiabank has a very large mortgage portfolio and expects two more rate increases to 2.25%. The Bank Rate was 4.00% in 2007, before the financial crisis, so the forecast rates are not outside the normal long-term range.
The Prime Rate rises and falls at the same time as the Bank Rate, so it is possible variable and adjustable mortgage rates could rise 0.25% to 0.50% by the end of 2020. If this worries you, then consider a fixed rate mortgage. Flat rates or falling rates are a good opportunity to take advantage of variable rates.
The big news here is that economists at Bank of Montreal (solid lines on the chart below) expect rates to stay very low for the next two years. The scary part of that forecast is rates that low would be an appropriate response to a recession. Scotiabank is taking the opposite view with rates climbing as high as they were last fall before the Bank of Canada intervened.
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 were less volatile than the past 3 years. The FSI is an interesting piece of information but don’t think of it as an early warning system.
In truth, a recession is 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 put 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 3.2% 5-year mortgage rate will start benefiting you by the end of 2019 if variable rates climb to 3.40%.
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 Apr 2019||Dec 2019||Dec 2020|
|5 Year Variable Mortgage Rate||2.30%||3.05%||3.05% - 3.25%||3.15%||3.15%|
|5 Year Fixed Mortgage Rate||3.25%||3.60%||3.09% - 3.34%||3.41%||3.59%|
Lock in a 5-year fixed rate?
Buy a home now or wait for the next cycle?
The average forecaster predicts variable rates will stay flat over the next two years. A minority predict rate increases in 2019, 2020, and 2021 while others predict a recession will lead to rates dropping. 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 do 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 put 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 to 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% (i.e., 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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