Relying on notions of the way things once were is no longer possible, says CEO
In the rollercoaster mortgage market of the past three years, few trends have been more difficult to predict than the trajectory of interest rates.
As the full implications of the COVID-19 pandemic became clear in March 2020, the Bank of Canada slashed its trendsetting rate to a rock-bottom 0.25%, a move designed to mitigate the “serious consequences” of economic disruptions, public health measures and business closures by easing borrowing costs.
Throughout most of the next two years, the central bank would keep that rate – which heavily influences variable mortgage rates – unchanged, with Bank governor Tiff Macklem asserting that Canadians could expect low rates to prevail “for a long time.”
However, with inflation beginning to surge in early 2022, it became clear that the days of record-low rates were coming to an end – and in March last year, the central bank introduced a 25-basis-point jump that marked the first in a salvo of rate hikes over the ensuing 15 months.
The Bank’s benchmark rate now sits at 4.75%, 450 points higher than its pandemic level, in a spike that’s created challenges for mortgage borrowers and would-be buyers alike.
Camilo Rodriguez (pictured top), chief executive at the Mortgages Lab brokerage, told Canadian Mortgage Professional that the unpredictable economic environment has also seen an adjustment for many mortgage brokers in the advice they’re providing clients and borrowers on interest rates.
“[In previous years] I would tell them that based on data, the prime rate movement with the central bank is not like the stock market,” he said. “The prime rate is a very stable rate that would only go up or down very slowly over a long period of time each year – you’d get maybe two increases, because that’s what we saw in the past.
“And now that’s out the door because that’s no longer the case – so you have to rethink risk and everything else right now. Even today, we believe that rates are very high and they’re near the top of a curve, and maybe we’re going to go even more and then we’ll start to slow down and decrease.”
That might not necessarily transpire, Rodriguez added, with little clarity on where the Bank of Canada’s rate-hiking trajectory – and the upward rise in five-year Government of Canada bond yields, which lead fixed rates – will end.
The Bank of Canada’s most recent hike was essentially superfluous, according to Andrew Grantham of CIBC Capital Markets.https://t.co/irP3wS3vVF#mortgagenews #ratehike #economy #interestrates
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 4, 2023
When will the Bank of Canada end its series of rate hikes?
The central bank hit pause on rate hikes in March and April of this year, introducing no further increases in its rate decisions in those months and indicating that it would be prepared to stay on hold if economic trends continued to play out as anticipated.
Still, resolute inflation and an unexpectedly hot economy impelled a further rate increase last month, and many market analysts believe another 25-point jump is coming down the line in next week’s announcement.
Meanwhile, speculation continues to grow on whether Canada’s economy will be able to avoid a so-called “hard landing” as a result of the central bank’s moves to raise borrowing costs, with some economists believing a sharp and painful recession could be on the way.
What should mortgage brokers be keeping in mind about the current environment?
In light of that economic uncertainty, it’s essential that brokers and agents base their advice to clients on the current realities rather than those of days gone by, Rodriguez said.
“People come for advice to people with experience,” he explained. “But what I’ve realized is that sometimes you have to rethink because you’re making decisions or going through data based on what your experience is, and now we’re living in a different world and maybe some of the things in the past do not apply to today.
“So you’re always driving looking at the rearview mirror. Because we don’t know what the future looks like, we tend to base our decisions on what has happened in the past that we know for sure. It’s a fact that things are changing quite rapidly – and I think right now, most people are looking for safety.”
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