As some Canadian lenders expect central banks, such as the Bank of Canada, to lower influential interest rates in 2024, borrowers can expect a late Christmas present with lower rates on certain types of mortgages.
Rates of less than five per cent on specific types of fixed mortgages are on offer — the lowest Canadians looking to finance a home purchase have seen since the late spring.
“The last time we saw a five year fixed at around 4.89 or 4.99 per cent was the middle of May [2023], around Victoria Day weekend,” said Victor Tran, with ratesdotca, a website that compares mortgage rates, credit card products and insurance costs for Canadians.
Tran, along with other mortgage industry experts and economists, points to lower returns from government bonds as a reason for the drop in some mortgage costs.
“Fixed mortgage rates are directly tied to the government bond yields. So we peaked in October,” he said in an interview with CBC News, noting that the yields have since dived.
Bond yields vs. interest rates
The select mortgage rates that have fallen below five per cent are currently only for fixed five year, insured mortgage terms. This would typically be mortgages with a down payment of less than 20 per cent.
Canadians in the market for that specific type of mortgage may be seeing lower costs than earlier this year.
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“They will find some savings if they have to renew a mortgage in the next coming months,” said Tran, who noted that it’s “really nice” to see some mortgage rates coming down as 2023 wraps up.
But lower government bond yields aren’t going to help Canadians who prefer variable mortgage rates. At least not yet, explained James Laird of Canadian mortgage website Ratehub.
“Bond yields react to future things, whereas variable rate mortgages and home equity lines of credit actually have to wait for the Bank of Canada to lower that overnight [interest] rate, which will cause the prime rate to drop, therefore lowering variable rates and home equity lines of credit,” he said.
Laird also pointed out that his company has been tracking housing affordability in many Canadian cities, and that while affordability has improved in some regions, that was due to house prices falling, not because of rates.
However, even if just one specific type of fixed mortgage rate has lowered, Laird believes Canadians should be pleased.
“Consumers do not like uncertainty and they certainly don’t like rates rising with an unknown top. And now that it seems like the top is probably behind us and rates are coming down, we’re seeing enthusiasm for people to reenter the housing market in the new year,” he said.
Lower rates could mean more housing demand
Some mortgage brokers, such as Vancouver’s Jacob Sneg, point out that many Canadians are waiting on lower mortgages before getting into the housing market.
“I’m constantly in touch with my clients, and they are all on the fence,” he said.
But he also cautioned that being on that fence could cost more in the long run, because as mortgage rates drop, more buyers are likely to enter the market and buyers will face more competition for homes thereby increasing the purchase price.
“If you say, ‘I’m not buying because of the high rate,’ so maybe in three months you get a better rate, but you lose on the price,” said Sneg.
Canadians have been paying more for everything as prices surged during the pandemic. But as inflation eases, prices will remain high and some economists say that’s a good thing.
Lower rates may not bring bigger economy
Canada’s central bank had been increasing interest rates to try to lower inflation, and the resulting higher borrowing costs have caused a pullback in business investment and consumer spending.
In part, this could be because Canadians had to divert more of their budgets toward higher mortgage costs.
According to The Canadian Press, researchers at the Bank of Canada said about 45 per cent of mortgages that were taken out before the central bank started raising rates saw an increase in their payments by the end of November.
The Bank of Canada researchers said nearly all remaining mortgage holders in this group will renew by the end of 2026, likely meaning higher payments for them as well, and this wave of mortgage renewals is expected to have a chilling effect on the economy.
Forecasts suggest economic growth will be weak in 2024 before picking up again toward the end of the year.