Mortgage Rate Update – The Rate Grinch Strikes Again

As we bring 2022 to a close, the Bank of Canada (BOC) Governor Tiff Macklem (Tiff) increased the prime rate by 0.5% to ensure we get the message to go easy on the spending this Christmas. However, he did elude to some boxing day specials, which I’ll cover in my post today.

Before I jump into today’s commentary, I’d just like to say again that my goal with these updates is to take an incredibly dry press release and make it informative, relatable and somewhat entertaining – hence the sometimes colourful analogies. Economics is part finance, part human behaviour, and part history lesson. After writing almost 65 rate updates since 2015 ( close to 40,000 words), I realize that I will never be 100% right, but I know I can guide you in the right direction. 

With that said, let’s jump into today’s update! As usual, I’ll start with translating the key points of the BOC press release into “English.”

Tiff continues to beat the drum of supply vs demand in his decision to raise rates. Citing that he needs to control demand (which spiked over the “summer of liberty” due to open travel) by raising rates. Interestingly, three paragraphs later, he speaks about how the supply chain bottlenecks are improving, which should be the key to returning inflation to its target of 2%. At the risk of sounding like a broken record, we don’t have a demand issue; we have a supply issue. Combined with higher oil prices due to the Ukraine conflict, these two factors are 90% of what is causing inflation. The good news is Tiff sees 50% of what’s causing inflation on the mend, which is why he hinted this might be his last rate increase.

That’s one point for lower rates next year.

The next point mentioned in the press release is the coming recession. Did Tiff drop the “R” word?! Heck no! Having an economist make a definitive statement would cause the universe to implode! He is expecting growth to stall between now and March 2023. As they say, if it walks like a duck. The good news is that he expects the economy to contract – which is the opposite of inflation. Looking at today’s 5 year bond rate and 10 year bond rates, the markets (read: big institutional investors) feel a recession is on the way. I know it sounds counterintuitive, but this is good news for your mortgage. At market close today, the 5 year government bond touched 2.97%, which hasn’t happened since late August this year. Which was just before the big rate hikes started.

That’s another point for lower rates next year.

The final item in the press release was the labour shortage and wage pressure. Tiff’s concern here is during a labour shortage, workers can demand higher wages. Higher wages leads to higher demand for goods, which is the fire Tiff is currently trying to put out. Economist Benjamin Tal spoke a few months about the tight labour market issue. His research suggested that it was more a function of the restricted immigration policy during COVID vs workers disappearing from the workforce. Now that the borders are open, we’ll likely see an easing of labour pressure, easing the supply chain issues causing inflation.

It’s questionable, but let’s call that another point for lower rates next year.

So what does this mean for your mortgage? 

We might have hit a turning point, signifying the end of the rate increases. 

I know that sounds optimistic, but one thing not in your news feed is the BOC has been raising rates and unwinding all the quantitative easing done during COVID at the same time. The BOC has been far more aggressive than the US Federal Reserve in this regard, and the way the Canadian banking system is designed, interest rate increases pack more of a financial punch up here than they do down in the US. So when you’re watching the news, don’t get sucked into the noise around US inflation.

The other supporting reason for the “turning point” theory is that the big six banks have priced inflation into their fixed mortgages. Now that the word recession is in the air, that premium, combined with the costs of funds getting cheaper, gives the banks room to lower mortgage rates. In addition, spring tends to be a busy time for real estate, and the banks will be super hungry for market share, given how slow the market has been this past quarter. Starting in late January, expect to see a lot of promotions offered for mortgages that fund within 30 or 60 days. 

So what should you do?

It pays to wait.

Patience is critical at this point in the economic cycle, and the odds are finally stacking up in your favour. And to quote financial advice from “The King” … Wise man said only fools rush in…

So don’t rush into that early renewal: Expect a call from the banks to renew your mortgage early. Keep in mind these calls are from sales centres, and the sales staff have targets that come from bosses above. These calls are designed to prey on your fears and usually come with a limited time for you to make a decision. These calls aren’t consultative, and the advice around which term to take has about as much thought put into it as picking an item off a drive-thru menu.

Don’t rush into fixing your variable: For those of you in a variable rate mortgage, I know your patience is wearing thin. Trust me, I’m with you, but the one thing that keeps me going is knowing that variable rate mortgages, like stocks, outperform over the long run. When the market does turn, the prime rate will fall faster than the fixed mortgage interest rates. Keep in mind the rate of your variable mortgages is about the average rate over the 5 years of your term. So don’t get lured into fixing your mortgage when the bank calls.

And finally, don’t rush into any decision without giving me a call. It only takes about 20 minutes for me to guide you through what makes sense for you in the context of today’s economic climate. 

As an important person said to me once during a challenging time in my life – Trust me, I’ve been here before, and I know the way out.

The next Bank of Canada meeting is January 25th, 2023

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Disclaimer Notice: The views expressed in this blog post are based on our opinion. The information has been sourced from the Bank of Canada and several Canadian news sources. Any forecasts or expectations of the direction of interest rates are based on the collective experience of the Nishka Riley Mortgage Team, and as such, any recommendations must be taken within the context of your personal situation. As with any forecast, there is no way to guarantee the outcome of the real estate market or interest rates and in no way is a guarantee implied.