Canadian mortgage borrowers are going to be paying much higher rates soon. Desjardins’ latest consumer interest rate forecast shows the 5-year fixed rate mortgage climbing — a lot. Over the next few quarters, it can hit up to 7% — a rate that would have seemed impossible back in 2019. Elevated inflation may push borrowing costs to a generational high.
Canadian 5-Year Fixed Mortgage Rates Are Almost 5%
Canadian banks are raising rates aggressively to deal with rising funding costs. Desjardins’ posted rate for a 5-year fixed-rate mortgage is 4.99%, but 4.19% appears to be what brokers are offering. That brings up an important point about posted rates — almost no one pays them.
Today’s forecast looks at the 5-year fixed-rate mortgage, which is rarely charged. It typically exists for penalties, with a discount almost always applied for borrowers. The discount in this case is 80 basis points, which is typical for the market. Knowing this, few will ever pay the posted rate of interest. However, the discount isn’t very big as rates climb, and it’s still going to cost a lot more to borrow.
Canadian 5-Year Fixed Mortgage Rates Can Climb To 7%
Over the next year, the 5-year fixed-rate mortgage is expected to gradually climb. Interest costs are forecast between 5.3% and 6.3% by the second quarter of 2022 and rise to 5.3-7.0% in the fourth quarter. The low range isn’t much higher than today, but the high end would likely create an economic shock.
Here’s another curveball — they expect mortgage rates to peak by next year. The first quarter of 2023 is forecast at 5.30-7.15%, a slight climb on the high end of the range. By the end of 2023, the range falls to 4.85-6.75%, indicating an economic slowdown. That wouldn’t be too surprising since inflation or rising rates both lead to lower demand.
Many risk uncertainties exist right now. Even the Bank of Canada (BoC) no longer sees inflation cooling on its own, or in a reasonable amount of time. They see 2024 as the soonest inflation can hit the target range. This is in-line with other economists (finally), as long as the economy isn’t derailed.
A lot of uncertainty but one thing is for sure — the era of dirt-cheap rates is in the rear view mirror.
Oh, gee! You mean this hyper bubble isn’t just gonna blow bigger forever. Weird.
Saretsky figures anything sustained and over 4% will precipitate price drops. Anything even in the ballpark of 7% will be an absolute blood bath.
Exciting times! I mean, if you’re not indebted up to your eyeballs that is.
I wouldn’t be surprised if the real estate industry coerced the Bank of Canada not to raise interest rates. High interest rates means less available mortgage to qualify. This results in lower prices for homes because the bank can’t give a million dollars to buy a few logs at Wasaga Beach or Georgian Bay.
yes, but when you have corporations and forigen national buying up anything they can, I don’t expect prices to come down. Maybe the insane over bidding will cool down, but no fall in pricing.
No amount of real estate lobbying is going to prevent the BoC from raising rates at the moment. It would be acting blatantly against its mandate and that would necessitate a currency crisis which is far worse than a collapse in the real estate sector.
it’s also a political career destroyer to let inflation run unchecked – people don’t care that their net worth has doubled in 2 years when they’re paying 2x at the pumps or the grocery store.
Agreed! Rate increase is nonstopable in at least one year. US would increase rate as well. We have to follow it. Stagflation is kind of under the way no matter what BOC said. 7% is not unacceptable. Remember how much you pay 1990s?
Unfortunately only the poor and working class are the first to feel the pain of groceries increasing by 50%, while the home owner class who bought homes for a penny in the 1970s don’t mind the inflation because they are cashing out to retire in a third world country, driving inequality in those countries.
I think sub-million market will stay robust with mid-high end market seeing some slowdown in growth.
What’s it going to take for prices to drop 10-15% YOY? Maybe 70%+ buyers disappearing YOY and that’s just not going to happen.
Owners will hold and see first before anything. Most owners are long term holders and don’t need to sell to make their mortgage payments.
10-15% YoY would be generous, considering some markets have seen a 10-20% pull back in just a month since rates started hiking. I believe we’re looking at a 50% valuation compression on real estate across the GTA.
We will likely be retesting late 2015 home valuations once we have hit bottom. This will occur as a painful bleed out as monetary policy remains hawkish for the next 2-3 years or so. Homeowners whether they be end user buyers, firms, or retail investors are already essentially attempting to time the market by selling at the perceived top. This will exacerbate devaluation fears and result in a cascade effect of mass liquidations. The narrative from agents will likely shift
towards taking whatever price is offered, or to start undercutting comparables in order to offload stock quickly. This is a common trope in real estate valuation compressions which accelerates price declines.
Ultimately, we all knew this market was not sustainable, now the BoC in tandem with our government is trying to give it as soft a landing as possible (which is not saying a lot).
“Owners will hold and see first before anything. Most owners are long term holders and don’t need to sell to make their mortgage payments.”
Yes, for various reasons, there will be people that will hold on to negative equity for years.
Some may take on a second job to support the new payment.
But those people are not going to prevent the bubble from blowing up, the speculators, and builders, and those who bought years ago will set the new low prices.
“Let’s jump in before we are priced out becomes”
“Let’s wait a while longer as prices are dropping”
Prices are set at the margin, that is what has happened at each of the past bubbles pops.
They are paying more at the pump because the price of a barrel went from negative 30 to a 100. If you think the boc will let the real estate market collapse and take the whole economy with it, you should revisit the definition of “too big to fail”.
What a mess.
Unless you bought >5 years ago and plan on staying put for at least another 5 years, there is no place to hide in Canada from all this. We’re renters and we’ve been getting pushed from one property to another while trying to stay in the community we call home. Any old, long-term landlords have cashed out; any new ones want to now saddle us with their ridiculously large mortgage (probably 100% leveraged) plus a little profit as rent. That would normally sway the equation to “might as well buy”. But watching and listening to the whale that is Canadian RE, with its big, bloated necrotic belly, start to grown and roll over really sways things to “no effing way”. My evil twin wants to see it all burn down, like, right now. But I know there’s a lot of pain ahead for a lot of families, some of whom we can just tell are going to be friends and relatives.
Meanwhile we still need a place to live. Honestly, I don’t know who to thank most for the state of things.
The BoC follows the US Fed, so everything else is just wishful thinking…
Yes, Steve Saretsky says it well. Also, back in January 2020 the overnight lending rate was 1.75% and debt was orders of magnitude less. We are currently sitting at 1% with a couple of expected back to back rate hikes coming right up on June 1st and July 13th most probably being of the 50 basis point type. That would put us at 2% which is past the previous peak which hasn’t happened in ~41 years since 1981. On top of that the BoC says there are more rate hikes coming and Quantitative Tightening will be in full swing. Things should be very interesting by the fall or even before.
I think what most of us don’t understand is that a 20-30% drop not only means the value of our home will fall, it also means that when you renew your mortgage loan the bank/lender will only give you a amount based on the current value of of home. Meaning, if you have a 1mil home and it drops by 30% the bank will only give you 700,00K.
Let that sink in for a minute….
I think the inflation we are seeing is big companies taking advantage and prices go unchecked because they can use many reasons for it. If the profits of these companies burst on the upside we will see how bad our system has become.