Just as a little refresher, a variable mortgage rate is an interest rate that is not fixed and fluctuates periodically throughout the term of a mortgage. Your monthly payments stay the same, however, if the rate increases that means that you’ll be paying more on interest and less towards your home (the principal). And it works the other way around too!
Variable Mortgage Rates remained unchanged on May 29th and are broadly expected to stay unchanged on the next Bank of Canada interest rate announcement date July 10th.
No matter how well-researched and modelled an economist’s prediction is, mortgage rate forecasts are still only educated guesses and, at best, they are as accurate as a weather forecast. They further into the future that a forecast is made, the less accurate it is. Most of last year’s forecasts did, however, correctly anticipate three rate hikes, but they didn’t predict an economic cooldown that would put a pause on rate hikes.
The Canadian economy shrank in December and has continued to struggle since. TD’s Brian DePratto says, “developments of late suggest the risks tilt towards less growth than might have otherwise been the case." A housing slowdown in Western Canada will not help growth either.
Realtors often say that housing prices will continue to skyrocket because of economic growth, but we’re looking at some drastically different results. Housing prices in cities with strong economic growth, such as Vancouver and Toronto, have recently seen some pretty substantial drops in activity, which have not been positive for the economy. Fewer homes being purchased is a direct reflection of lower revenue for realtors, mortgage brokers and banks, home inspectors and appraisers, and real estate lawyers. It can also lead to delayed condo developments and a decline in work for the trades who build these projects. Falling house prices can weaken the housing sector which hurts the economy and then leads to further house price declines. We hope that Canada is not caught in this type of economic downward spiral. The charts below illustrate how much the slowdown impacted home purchases in Metro Vancouver and Metro Toronto.
Variable mortgage rates are still below what would be considered a normal range. According to the Bank of Canada, “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.” Essentially, rates will continue to rise unless there’s a recession.
There used to be consensus that rates would eventually rise but that is no longer the case. In the near-term, Variable Mortgage Rate hikes are on a pause.
Once rate changes resume, however, some analysts expect rates will rise in response to strong economic growth while others expect a recession will pull rates down.
Variable and adjustable mortgage rates are tied to the Bank Rate (the rate at which banks can borrow from the Bank of Canada)
Let’s just say that economists aren’t very confident in what they think is going to happen. With all the economic uncertainty, most banks are predicting no change in rates. According to National Bank, the Bank of Canada may have to wait until summer 2020 before ordering fresh rate hikes.” Central 1, on the other hand, expects rates to drop in the second half of 2020 “in response to Canada’s slowing growth”.
It is hard to predict a recession, but based on current information it is likely variable and adjustable mortgage rates will stay flay or drop between now and 2021. If the risk of rates rising still worries you then you should consider a fixed rate mortgage. Generally, we recommend variable rates when rates are flat or falling.
In the past, most economists agreed on where rates are headed but these days their predictions appear as scientific as a coin toss.
The average forecast would see rates rise by a very modest quarter of a percent. In this forecast, National Bank of Canada has forecast rates will be almost 1% higher going into 2021 whereas Central 1 (i.e., the economists expecting an economic slowdown) are expecting rates to be a quarter percent lower. In the case that rates are predicted to drop, this would be the appropriate response to a recession, which isn’t really news to us – the TD Canada Trust report below can tell you more about it.
The short answer is we can never know exactly when a recession will strike, but we do know that it is inevitable at some point. This TD Bank report looks at the likelihood of a recession with their Financial Stress Indicator (FSI). As you can see, there was very little warning for the financial crisis between 2007-2008.
Lock in a 5-year fixed rate?
Buy a home now or wait for the next cycle?
As you can see there’s a lot of uncertainty, and there’s no right answer to whether you take a variable rate mortgage or lock in.
Future fixed rates will probably be higher than today, and are less likely to drop lower than today’s rates unless there’s a recession. So, locking in today’s 2.9% 5-year mortgage rate will definitely start benefiting you if variable rates begin climb. 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.
If you have a fair risk tolerance, variable rates seem like the best bet. Based on the latest forecasts, variable rates are more likely to fall than rise in the next two years and in a flat or falling rate environment variable rates generally save borrowers more in interest costs.
If you are planning to sell or move in the next few years, however, locking in a rate can result in a large penalty fee if you cancel before the full term is completed. Just be sure that you factor this into your decision.
If you plan to buy in the next 3 years, be mindful that rising rates reduce the amount of mortgage financing a bank can offer you. This means you have less home buying budget to work with. Home prices in many Western Canada markets have been steadily dropping since 2018, so don’t feel pressured to rush into the market and don’t pay more than the list price.
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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