Mortgage Rate Update – What Goes Up, Surely Must Come Down?
September 6, 2023
Rate Update – Tiff Sneaks One Under The Tree
December 6, 2023
As the crisp fall air produces a dusting of snow on the mountains, there is a sense of hope that we could be in store for a fantastic ski season. The same sense of hope was reaffirmed today by the Bank of Canada as they took another pause on interest rate hikes.
Today’s press release was a precisely balanced piece of prose that hinted at things getting better but warned that Governor Tiff still has his finger on the trigger to raise rates if needed. Here is a quick summary of what he said about today’s decision and what the future holds for interest rates.
Tiff’s Reasons For Not Changing Prime:
As mentioned in our previous updates, it takes about a year to 18 months for interest rates to take hold, and that’s exactly what Tiff is seeing right now. Consumer spending is starting to slow, supply chain bottlenecks are all but gone, and the global economy, particularly China, is slowing. The USA is still holding strong; however, that is more a function of homeowners being able to lock in their mortgage rate for 15 years or longer. Consumers in Canada are also starting to rely more on credit, which is usually a sign that household spending is about to decrease. All of the above gave the BOC comfort to wait and see.
Tiff’s Reasons For Keeping His Finger on The Trigger:
Though inflation looks like it’s settling down, a few mixed data signals are keeping Tiff on alert. Higher wages is one item, and higher rents, a byproduct of higher mortgage rates, is another. These items lead to entrenched inflation but could be cured with a recession. Oil prices have picked up, but that is more a function of geopolitical instability. Tiff also feels that household spending and business investment will increase in 2025.
Interestingly, most inflationary concerns come from the current government in office. The sentence “spending by governments contributes materially to growth over the forecast horizon” particularly caught my eye. It’s as if Tiff is driving the car with his foot on the break while the prime minister on the passenger side has managed to sneak his leg over the centre console and floor the gas.
So what does this mean for mortgage rates?
In short, nothing yet. The bond market isn’t convinced that the central bank is done, and the “higher for longer” narrative is not helping. Until we see two back-to-back reports that inflation is under control the bond market is going remain skittish, meaning interest rates will stay at this level for the next 2 to 3 months. This week’s move in the 10 year government bond suggests that rates might be elevated for a while as well. Having said that, the 10 year bond seems to be more impacted by excess government spending and the impact the overall debt levels are having on the Canadian dollar vs shorter term economic items.
Once we see a clear path to lower inflation, you can expect mortgage rates to drop significantly AND fast. As I’ve mentioned in several of my posts, the 5 year bond peaked in June 2007 at 4.647% and at that time the 5 year fixed was 5.65%. As of today the 5 year bond is at 4.256% and the average 5 year fixed is 6.44%. That is almost 1% greater than 2007, but with a 0.4% lower bond rate!!
The Bottom Line – what to do with your mortgage:
If your maturity is past October 2024:
You are still in a good place. Don’t rush to pay down your mortgage but instead divert your funds to a TFSA. Until we can see a clear path out of this inflationary environment; cash, as they say, is king. Bracing for higher mortgage payments at maturity with a savings cushion is the best course of action.
If your mortgage is maturing between January and September 2024:
Now is the time to start having planning conversations about your upcoming maturity. Looking at your budget and planning for future expenses (i.e. cars, kids, university tuition) is something that we can build into a mortgage plan that makes sure you have the breathing room to continue living a life filled with great experiences – not stress.
If you have a maturity between now and January:
We can help you answer the question … if the likelihood of rates falling is high, what term do I take? With our unique approach to renewal planning, we can guide you to a decision that will help you sleep at night AND make sure you are positioned to take advantage of rate changes. As a mortgage broker, we have access to a wide range of products that can keep you on budget, decrease your interest rate risk, and meet your desire to save money.
We are getting closer to the end of this inflationary journey. And I promise when this is over, it will bring a new cycle of real estate opportunities. And I look forward to writing to you about how to take advantage of them!
Keep well
The next Bank of Canada meeting is December 6th, 2023
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