Don't expect a return to the rates of the pandemic
Mortgage holders and hopeful homebuyers have seen welcome news at last on the interest rate front over the summer, with both fixed and variable rates ticking lower.
Canada’s five-year government bond yield, which strongly influences fixed mortgage rates, has been on a downward trend throughout most of the past few months, partly due to gathering storm clouds over the US and Canadian economies.
The Bank of Canada, meanwhile, introduced its first interest rate cuts for over four years, bringing its overnight rate – which leads variable mortgage rates – down by a total of 50 basis points in June and July.
Those developments have at least slightly improved the affordability outlook for Canada’s housing market, although the question of how far rates might fall is anyone’s guess.
Ryan Sims, a mortgage agent with TMG The Mortgage Group, cautioned brokers against advising their clients that a significant further drop in rates is likely. “Rates are coming down, which is good, but I don’t know how much more room there really is to go lower,” he told Canadian Mortgage Professional.
“I think too many people expect rates to go back to almost the COVID lows. They know they won’t go right back there – but they expect them lower than where they currently are. And I just don’t know how much lower we can truly go.”
The bond market, Sims pointed out, is already pricing in things that are likely to happen in nine to 12 months, including a further weakening in the economy. That means interest rates already reflect a probable downturn.
Equally, while the five-year bond yield may continue trending lower, that won’t necessarily see a corresponding drop in fixed rates, Sims recently emphasized. Borrowers shouldn’t expect an immediate basis-point-for-basis-point dip in their rates in line with bond yield declines. “Eventually it will [match], but it’s going to be a bit of a lag.
“My prognostication would be for every basis point you lose in the bond market, you’re probably only going to get about half a basis point, maybe three quarters of a basis point to the mortgage rates themselves.”
Raphael Ambrozewicz, an advisor at BlueShore Financial, highlighted that despite the stress test not applying to renewals with the same lender, it has helped many homeowners cope with today’s elevated rates.
— Canadian Mortgage Professional Magazine (@CMPmagazine) August 22, 2024
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What are borrowers being advised to keep top of mind?
While the landscape may have changed somewhat thanks to recent rate drops, Sims said his advice for borrowers would remain the same: understand what they’re hoping to accomplish with their mortgage and select an option that allows them to achieve that.
The choice between fixed and variable in the current market is still centred around that question, according to Sims. “If you want financial security or you’re comfortable paying that fixed rate, then pay the fixed rate,” he said. “If you’re comfortable taking the risk of a variable, take the risk of a variable.”
In the long run, variable rates are expected to fall further, with the Bank of Canada seemingly set for another flurry of rate cuts in the coming months and moving into 2025.
Lower variable rates down the line seem a safe bet – “but the million-dollar question to me always is ‘Will the banks start to loosen or tighten the spread on that variable?’” Sims said. “Today, you can get it at prime minus one. Maybe that goes down to prime minus a half.
“[In that case] the variable rate went down, but unfortunately the end result for the client wasn’t as advantageous as it should be.”
What’s the outlook for the US?
South of the border, US Federal Reserve chair Jerome Powell appeared to open the door to a rate cut as early as September in comments during the central bank’s annual retreat at Jackson Hole, Wyoming last week.
Still, Sims noted that the US economy, while softening, is showing more robustness than Canada’s, a fact that could dissuade the Fed from cutting rates several times before the end of the year.
Some of the economic data in the US is gloomy – “but on the other hand, we saw retail sales that came in above expectations,” he pointed out. “Everybody got upset when the job numbers missed [estimates], but the US still created 110,000 jobs.
“So there is a little bit more strength in the US than there is in Canada right now. I think the market is baking in more rate cuts than the Fed will give us this year.”
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