Mortgage Rate Update – Maybe This Time?
September 7, 2022
Mortgage Rate Update – The Rate Grinch Strikes Again
December 7, 2022
Today Governor Tiff Macklem (Tiff) of the Bank of Canada (BOC) surprised Canadians with “only” a 50bps (0.5 percent) rate increase. Given last week’s inflation figures and ensuing media frenzy, the world was expecting a 75bps increase, if not a 100 bps hike.
It’s “interesting” to note that we’ve come to think of 50bps as having dodged a bullet!
Though today’s increase was less than expected, Tiff made it abundantly clear that we are not out of the woods. The capital markets seem to disagree, judging how the 5 year Government of Canada bond yield dropped from 3.9% to 3.4% right after the announcement. A dramatic drop of close to 50bps in such a short time frame states that the markets believe we are closer to the end of this tightening cycle than Tiff suggests.
So finally, we have a glimmer of light at the end of the tunnel! What does that mean for your mortgage?
Before we dive into your mortgage, let’s address the elephant in the room…is Tiff pulling his rate punches because he is worried about his job?
Possibly.
Should he have raised rates by 75bps? Maybe.
Will we suffer from Tiff’s lack of conviction to make tough decisions? I doubt.
Why?
Because as I’ve said from the beginning of these rate hikes, we are experiencing a supply chain issue, not a demand issue, which Tiff affirmed in today’s press conference.
So when will the rate increases be over?
Expect to see another 50bps of tightening. That could come in either at the pace of 1 x 50bps or 2 x 25bps. What to look for is a confirmation that COVID is now in an endemic stage ( I think we can all agree that it is ) and that the Russians decide that being the Ukraine in the winter might be a bad idea. These two economic forces put wind in inflation’s sail and can quickly suck the wind out if one or both are eliminated.
Will the Bank of Canada drop rates right away? Unfortunately no. They will want to ensure inflation is fully put back in its cage. I would expect that once Tiff gives the “coast is clear” signal, he’ll wait three months before the first rate decrease. What will be interesting is the speed of the rate decreases given how fast he moved rates up. I wouldn’t be surprised if he started with 50 bps and then did 2 x 25 bps three months after.
When can you expect to see a shift in rates? According to Tiff, we’ll see a shift in the market in the first 1/4 of 2023. Growth is expected to slow to under 2%, and inflation should return to 3%. By 2024 Tiff is expecting things will be back to “normal.”
What does that look like for interest rates? Once the capital markets feel inflation is under control, you will see fixed mortgage rates drop. Expect that by early March, the banks will want to beef up their mortgage portfolio, and the rate wars will begin. Hopefully, by summer, a rate of 3.89% to 4.35% might be available.
Where do I see rates in the next 2-4 years? Looking back over my rates sheets from the past ten years, 2.99% will be the lowest we’ll see in the next 5 year period and that 3.69% will be the average 5 year fixed mortgage rate. Keep in mind that there is a US election in November 2024, and there is a strong correlation between low rates and re-election years.
What should you do if you are in a variable mortgage? Stay put for now. We are close to the end, and historically variable rate mortgage rates have always dropped faster than their fixed rate counterpart at this point in the economic cycle.
What should you do if your mortgage is coming up in the next 2 – 3 years? To be direct, brace for it. You likely got your mortgage at one of the lowest periods in history, and have a super low payment. You should budget for an increase of roughly $100 per $100,000 of mortgage balance you have outstanding at the time of maturity. We will be doing a short email series on how to handle your maturity in these times. If you would like to find out more, click here, and you’ll be added to the list.
The bottom line:
Going through this inflationary period has been incredibly stressful. Finances are a cornerstone of our sense of security and, therefore, our mental well-being.
I’m there with you. Though I’ve been in this industry since 1995, I’m not immune from the stress of the current economic environment. What I’m focusing on is that today’s announcement suggests that inflation is getting under control and that the economy is moving back to normal.
One final random thought before I let you go…what if we, as Canadians, went on a rotating lockdown of our wallets? What impact would that have on inflation?! I’ll go first and let you know how it goes!
Keep well!
The next Bank of Canada meeting is December 7th, 2022
Did you Like this post? Then you’ll Like my Facebook Page. It’s filled with current news on what’s going on in the world of real estate.
