Mortgage rundown: Higher interest rates will bring lower interest rates

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Canada’s prime interest rate should climb in the first half of 2022, but that’s not the only concern if you’re considering a variable rate. Equally important is how long the prime rate stays high.

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Most who plan to float their mortgage rate for the next five years are betting that their average rate over that time frame will be less than a comparable fixed rate. If that’s your bet, here are two things that can limit how long rates stay high:

high debt levels

When people have a lot of debt, they can’t buy as much. The economy then needs more rate stimulus to keep inflation near the Bank of Canada’s 2-percent target. But consider that at least 25 percent of domestic demand now comes from interest-sensitive private activity, a record that, says National Bank Financial, “is entirely responsible for Canada’s external dependence on housing.” What’s more, a record 26 percent The Bank of Canada says new mortgages have high debt-to-income ratios. Our central bank weighs such factors heavily when setting rates – which is why the National Bank looks to be “doing a little too much” when it comes to impending rate hikes.

home price risk


History has shown that asset bubbles cause the worst recessions, and they can affect interest rates. People may debate whether we are in a bubble, but one thing is undeniable: the value of Canadian real estate has now reached an astonishing 500 percent of total disposable income, more than at any time in history and more than almost any other country.

On top of that, we’ve now got an influx of investors, creating “additional price expectations,” as the Bank of Canada calls it. This creates more potential for improvement, it says.

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The biggest question is, how will housing survive the higher rates? Record-low rates have been the No. 1 lever on the demand side for home prices, and rising rates will work that lever in reverse. To put it another way, higher rates can lead to price exhaustion, when not enough people can afford — or want to afford — the mortgage payment of an average home.

The Bank of Canada is of the view that vulnerable housing is “essential”, a related consideration given that a record 10 percent of our economy now depends on residential investment. This should pay interest to mortgagees for a number of reasons, not the least of which is to adversely affect housing sales, which could drive interest rates even lower.

How the above could affect the next interest rate cycle is uncertain. The Bank of Canada’s last six rate-hike sequences lasted about 12 months on average. With core inflation near a three-decade high, financial markets expect this to last at least 24 months, according to Bloomberg implied rate data.

Talking about inflation, it remains a wild card. The National Bank says that historically, inflation hasn’t peaked until 12 months after the Bank of Canada began raising rates. If prices continue to rise in 2022 before lowering, it could cause the central bank to tighten and slow the economy too much, leading to a rate topping around 2023-24.

As I wrote last time, the rate premium of fixed mortgage still seems to be warranted depending on the rate outlook of the market. But two to three years from now, it is becoming increasingly difficult to pay for the lock-in, given the potential economic risk.

The takeaway for mortgage buyers: Higher borrowing costs lead to lower borrowing costs. The greater the increase in five-year term mortgage rates compared to variable rates, the more it matters. And that fixed-variable gap is already close to a long-term high of 1.20 percentage points.

If you choose a leading rate (see the accompanying table) on an uninsured mortgage, my rate simulations suggest one thing. Despite inflation being a serious rate risk, if inflation eases by 2023 – as the Bank of Canada projects – the more you pay more than 2.59 percent for five years, the less likely you are to You will beat a variable rate.

rate check

The lowest uninsured mortgage rates held steady this week.

If you’re putting less than 20 percent, however, you can find default-insured five-year fixed rates as low as 2.02 percent in Alberta, BC, and Ontario, compared to 2.34 percent nationally. Just keep in mind that these cheap rates can have serious refinancing restrictions. Don’t take out these restrictive mortgages unless you’re certain you won’t need to sell or re-mortgage them within the next five years.

Lowest Nationally Advertised Mortgage Rates

Perioduninsuredthe providerInsurancethe provider
1 year fixed2.44%RBC1.99%true North
2 years fixed2.08%Scotia eHome1.99%Radius Financial
3 years fixed2.18%Scotia eHome2.13%Scotia eHome
4 years fixed2.33%Scotia eHome2.28%Scotia eHome
5 years fixed2.54%Orange2.34%Some
10 years fixed3.30%first national2.79%Some
5 year variable1.34%Straightforward0.90%true North

until 24 November.

Rates shown by lenders in at least nine provinces and by providers who advertise rates on their websites are as of November 24, 2024. Insured rates apply to those who make purchases with a down payment of less than 20 percent, or who change an already existing insured mortgage to a new lender. Insured rates apply to refinances and purchases in excess of $1 million and may include applicable lender rate premiums.

Robert McAllister is an interest rate analyst, mortgage strategist and columnist. you can follow him on twitter @RobMcLister,


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