Canada

Canadian Mortgage Rates Forecast To Rise Over 40%, Posted Rate Can Hit 7%: Desjardins

Canadian inflation is marching higher, and so are the expectations for mortgage rates. Desjardins economics sees the 5-year posted rate having more room to rise than fall in the future. The institution has forecast the posted 5-year fixed-rate mortgage can rise up to 40% by 2024. While the posted rate is rarely the rate paid by mortgage borrowers, it does impact a number of things. More importantly, it reflects an environment where credit is tightening.

The Posted Mortgage Rate Vs What You Really Pay

The posted mortgage rate is an unusually high mortgage rate that’s kind of like the sticker price of a car. It’s unreasonably high, few people will use it, and it’s mostly to help buyers feel like they’re getting a deal. The spread between the posted rate and a lender’s best available rate is usually between 220 to 250 bps. This means the rate borrows often pay is a full 2.2 to 2.5 percentage points lower than the posted rate. That doesn’t mean the posted rate is useless though.

The two biggest impacts it has are on payment penalties and the stress test. If you were to break your fixed-rate mortgage early, for say refinancing at a lower rate, you have to pay a penalty. That penalty is usually 3-months of interest, or the interest rate differential (IRD). The IRD is the difference between your rate and the posted rate closest to your remaining term. Then subtract any discount you received at origination. It’s pretty much what banks use to make sure you pay a big ole’ penalty for changing plans.

The stress test rate is also likely to be influenced by the posted rate, but maybe not directly. Originally the Bank of Canada benchmark rate was used to determine the stress test rate. This was based on the posted rate at various banks. OSFI, the bank regulator, found it wasn’t very responsive to risk though. Rather than rely on the benchmark, they established a rate floor — the minimum rate that can be used. The criteria for how the floor can evolve can change a lot from now until 2024. However, it’s unlikely the stress test rate would ever fall below the posted rate. The stress test rate is currently around 50bps higher than the posted rate.

Canadian 5-Year Fixed-Rate Mortgages Have More Upside Risk Than Downside

There’s uncertainty, but Canada’s faster than expected recovery shows more upside than down. The five-year posted fixed rate is 4.74% currently. In a downside scenario, they see this falling to 4.40% by the fourth quarter of 2021. The upside scenario sees it rising up to 5.25% in the same quarter. Higher inflation expectations are also contributing to a stronger upside scenario.

Canadian Posted 5-Year Fixed Rate Forecast

The upper and lower bound forecast for the posted 5-year fixed rate mortgage.

Source: Desjardins; Better Dwelling.

By next year, the posted 5-year fixed rate is forecast for an even higher maximum — breaching the 6 point mark. Rates are forecast to have a downside of 4.6% in 2022, and an upside of 6.20%. In 2023, the range rises to 4.70% to 6.60% for the full year. In 2023, it gets a little more uncertain with the range widening from 4.55% to 6.95%. While the latter range is wider, it has a lot more upside than downside. The probability of it falling would likely require a substantial economic slowdown. 

Since a number of factors go into a forecast, the longer the date, the more uncertainty it faces. Economic conditions would have to worsen and inflation drop for rates to fall. For rates to rise, Canada would have to continue a strong recovery, and/or see higher levels of inflation. Canada is so dependent on housing now, we likely have many people cheering on a crash to keep rates low.

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13 Comments

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  • Honli 4 months ago

    Back in 2008 -2009 there was “high inflation” too. They anyone raise rates? No, because the economy did not recover. Contrary to many people’s believe, interest rate does not rise due to inflation. Interest rise when there is high inflation and high gdp growth.

    • D 4 months ago

      > interest rate does not rise due to inflation.
      > Interest rise when there is high inflation and high gdp growth.

      That’s the same thing.

    • GTA Landlord 4 months ago

      Interest rates don’t have to rise when inflation rises. A government that crushes pensioners to handle debt for corporate handouts probably won’t last very long though.

  • John ey 4 months ago

    This is a stupid sensationalist click bait article.

    • Mortgage Guy 4 months ago

      “click bait” is the chant of the ignorant these days.

      Just because you don’t understand what something means, which is hard because Daniel did a good job explaining IRDs and rate floors, doesn’t mean it’s not written for people in the industry that are looking for this information.

      Why don’t you read something else up to your speed, like a coloring book?

      • Jimmy Hankles 4 months ago

        There are no references, no links, and no hard data. Where is the quote from Desjardins? Where is the link to them claiming this? I can see nothing on Google to corroborate these numbers.

        How can someone be such a jerk to strangers on the internet? Super sad.

      • Brent 4 months ago

        Nonsense. It’s absolutely clickbait and just waving your hand at anything you don’t like is exactly what you’ve just done, rather ironic!

        Basically the article boils down to well there is more chance of it going up and down. Well yeah no kidding considering we are at more or less the lowest rates in human history. 1.35% variable. It’s basically free money. So sure to say it’s more likely to go up how unhelpful is that. As for going up to x again they make it seem like actual rates would go up when really as your read the rest of the article they are talking about the posted rates they make a big point in pointing out no one actually pays. So if they said hey in 4 yrs your rates are more likely than not to go up to 2.5% or so then fair but they haven’t done that until you read to the end which completely describes what “clickbait” is…

        • Whiskey Foxtrot 4 months ago

          Oh boy. You’re the kid that thought his math teacher had it out for him, so you didn’t take any math for the rest of your life, aren’t you?

          Even people with brain damage have probability explained to them, and they understand it.

  • Nassim 4 months ago

    It’s burnt into my mind that a 30-year mortgage at 4.65% means 60% of all payments go to interest at minimum. 3 points below an upper bound is realistic, so you’re basically paying more than double for the home you bought. $1 million If you spend less than $70k on rent and have a million, you really should be renting tbh.

  • Mortgage Guy 4 months ago

    The posted rate scam for breaking your mortgage is a classic. Notice it didn’t fall when mortgage rates fell to less than 2%. They wanted to keep the spread for anyone that refinanced.

    • Van 4 months ago

      I don’t get why people ever go to the bank and not a mortgage broker. They always have better rates, and aren’t a 30 second model for approval at whatever rate they buy.

  • FOMO 4 months ago

    Banks be scammin? Nahh… haha. Tell me when they aren’t scanning.

  • khalid yusuf 4 months ago

    Even Siddals playbook

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