Canada

Canadian Mortgage Rates Will Rip Higher Soon, Here’s How High

The Canadian economy is improving, excluding some minor hiccups like this morning’s GDP. An improved economy needs less stimulus, and that means higher mortgage rates. To see what Canada is in for, we modeled a forecast range for 5-year fixed-rate mortgages. If Canada doesn’t go into a double-dip recession, much higher mortgage rates are coming. 

Canadian 5 Year Fixed-Rate Mortgage Forecast

Today we’re looking at 5-year fixed-rate mortgage interest, and where it’s heading. More specifically, we’ll be focusing on conventional (aka uninsured) mortgage rates. These are for homeowners with a decent amount of equity, and a loan to value ratio below 80%. Insured and variable rate mortgages follow a different path. However, they’ll generally follow the same trend.

This model is based on fixed income forecasts created by major financial institutions. Since they’re forecasting how much investors will make, we can forecast how much you’ll pay. Just a couple of quick notes for the nerds, and aspiring nerds.

The strength of the economy and the recovery are going to be big factors in determining how high these go. A stronger economy means a faster recovery, and along with that is higher mortgage rates. Weaker economic performance will generally mean lower rates to stimulate borrowing. As economic conditions change, so will these forecasts. 

Credit liquidity will also play a role in the direction of mortgage rates. If there’s excess capital to lend, mortgage lenders tend to accept smaller margins. This helps to lower the cost of borrowing since they’ll make it up on revenue. If capital for mortgages becomes scarce, mortgage rates rise to adjust to demand.

Today’s chart assumes a medium level of credit liquidity. That is, not much excess, but it’s not scarce either. That’s how the mortgage market was pre-pandemic, and we’ll assume it goes back to that.

Canadian Mortgage Rates Are Going To Climb

Mortgage borrowing costs are likely to reach pre-pandemic levels soon. Our median 5-year fixed-rate forecast is 2.55%  by the end of Q3 2021. Based on the most bullish yield forecast, it would rise to 2.65%. The downside yield forecast is the same as the median.

Most institutions have consistent near-term expectations. That sounds weird, but it makes sense. Near-term forecasts are the most visible, with the least number of variables compounding. As forecasts are further out, we’ll see the gap widen as their difference in outlook is magnified.

Canadian 5-Year Fixed Rate Mortgage Forecast

The forecast range for Canadian conventional 5-year fixed-rate mortgages, based on financial institution fixed income forecasts.

Source: Better Dwelling.

Mortgage Interest Rates Can Increase Substantially By Year-End

By the end of this year, we start to really see the potential for these rates to climb. By Q4 2021, the median forecast would put a typical 5-year fixed-rate mortgage at 2.73%. The forecast range becomes wider, going from 2.6% (low) to 2.85% (high). It may not sound like much, but it can have a big impact.

The rate of change is much more important than the actual number. If you go from a 2% rate to a 2.73% rate, your cost of interest rises 36.5%. If we exclude the stress test, buying power sees a 7.84% decline. Since recent buyers are mostly stress-tested, default isn’t much of an issue. However, the cost and size of debt can be.

Mortgages Rates May Rise More Than A Point By Next Year

Next year is going to be a big one for mortgage rates if the economy recovers as expected. The median 5-year fixed-rate forecast works out to 3.10% by the end of Q3 2022, which can lead to an 11.5% reduction in buying power. On the low end, the rate still comes in at 2.7%, reducing buying power by 8.0% outside of a stress test. The high range would see it climb all the way to 3.30%, pulling maximum mortgage credit 14.3% lower. Keep in mind the stress test rate may also adjust higher as well. It depends on how comfortable OSFI is with rates rising closer to their stress test number.

Another factor to consider here is the cost of the renewal. A $500,000 mortgage with a 5-year fixed rate of 2.0% would pay around $46,080 in interest over the term. If that rises to 3.1% next year, the cost of interest over the same period would be $72,183. I don’t know about you, but $26,000 is a decent chunk of money to spend over a year.

Existing mortgage holders close to renewal may want to text their mortgage broker. If you see the economy improving, locking in rates might save you a little money. It might not though, depending on whether you have prepayment penalties. It’s always best to run the numbers with a broker on various scenarios though.

Pending a double-dip recession doesn’t occur, higher mortgage rates are coming. Maybe not as high as the Desjardins forecast, but definitely higher than it is now. Those supersized mortgages with short terms are going to divert more capital from the economy on renewal. The takeaway isn’t how high mortgage rates can climb though. It’s how absurdly cheap mortgage debt has been during the pandemic.

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25 Comments

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  • Trader Jim 2 months ago

    Even higher if inflation is sticky around 3%. I mean the inflation numbers, not the reality which is much higher. The detachment between reality and official CPI will hit show up in the change in appreciation of the currency.

  • Vince 2 months ago

    5 year mortgage rates are 1% now. We might see 1.5% by next year, but not likely. Low rates are here to stay.

    • Mortgage Guy 2 months ago

      Do you by chance mean variable-rate or insured mortgages? I’ve only seen one promo for a foreign bank that’s ever lent that low in Canada, and it’s was never for a conventional mortgage. Variables are tied to the current cost of bank lending, and insured mortgages are whatever taxpayers are willing to lose to prop up the market.

      Once balance sheet operations taper with the US, I would be surprised to see even an insured mortgage below 1.5%.

    • Don Kwasny 2 months ago

      Can I borrow your crystal ball

  • Kath 2 months ago

    “Another factor to consider here is the cost of the renewal. A $500,000 mortgage with a 5-year fixed rate of 2.0% would pay around $46,080 in interest over the term. If that rises to 3.1% next year, the cost of interest over the same period would be $72,183. I don’t know about you, but $26,000 is a decent chunk of money to spend over a year. ”

    The “decent chunk of money” is spent over 5 years, not one year, no?

    • Marc 2 months ago

      I think the year is referring to the difference in rates from this year to next.

      • Ahmed 2 months ago

        Ah, that makes sense. I was going to say the same thing. I guess it’s a commitment to pay that based on what you do over the next year.

    • Leila 2 months ago

      That’s right, that is the difference over the term of 5 years.

  • Marc 2 months ago

    They want an election because they know this reaches a boiling point soon, and there’s no clean exit from it. Even if they lean on stimulus for the housing market, it’s a different economy when you aren’t giving people 2x their income to stay home.

    • Paul 2 months ago

      2000$ is not twice their income. Spoken like someone truly out of touch.

    • John 2 months ago

      I was going to say the same thing, thank you. So $26000 spent over 5 years is not a very big increase. That only works out to about $400 increase per month. $400 per increase in housing cost over 2 years is not a big deal, that is how much the rent has been going up for bigger houses in GTA over the last few years with exception of the pandemic period.

  • Ahmed 2 months ago

    Any forecast on variable rates? The street consensus seems to be it’ll rise to 2% by 2023, depending on how transitory inflation really is. That would pump variable rates up by maybe another 2 points, but it’s a close call for interest. The premium for safety might not be worth it, but who knows.

  • Van YIMBY 2 months ago

    The mortgage broker told us to lock up a fixed-rate this summer. Glad I did, because it’s already up a few points. Even with my pre-payment penalty, it was cheaper to break than wait.

  • Joe 2 months ago

    Wow, analysis of interest costs over 5 years then stating the difference of $26k is alot to pay in a year?! Sorry bud, write a legit article and get a legit response. You literally stand alone on this take.

    • GTA Landlord 2 months ago

      Is it really that hard to understand that paragraph? The rate is forecast to rise a year later. You’re gambling $26k for a year.

      Let me guess, with those kinds of reading skills you’re a mortgage broker or real estate agent? No way you have any skill that requires more than a weekend to learn.

  • Bkl 2 months ago

    Last year BD kept going on about how the housing market will crash etc. Now this, they need to understand as long as job numbers are not improving there is no increase in interest rates. A little inflation is not going to push rates higher. When will people understand to judge by what someone do not what they say. In this case the central banks say their mandate is to control inflation. The reality is their job is to maintain the system, hence employment rate is what they are really after.

    • KK 2 months ago

      I get it now.
      LETS NOT IMPROVE THE JOB SITUATION, to keep interests rates forever low and real estate market will go up forever because of our crapy job market! Sounds logical!
      No one working, but buying houses or all off us sort of Realestate agents.

    • SmugCanadian 1 month ago

      We can all speculate as much as we want, but it all comes down to when the US Fed starts to amp things up. We may lag by a month or two, but we will follow suit to whatever they do. The only time we didn’t follow was in 2008, but there is a lot of proof that was a mistake.

      • RainCityRyan 1 month ago

        Agreed. Jerome is essentially central banker to the world. So remember when we’re talking about the “Job Situation” what we really mean is the US “Job Situation”.

        Some developing economies are even raising rates already in anticipation of the FED so they don’t get caught on the back foot.

  • Makiyo 2 months ago

    😂 leave it to better dwelling to predict 4 rate hike in a year 🤣

    • GTA Landlord 2 months ago

      “Leave it to Better Dwelling…”

      That’s not their prediction, that’s based on consensus of the bank forecasts. I’m guessing the reason it’s 4 and not 3 is because of the difference between quarters for the first forecast, but they all they see the overnight rate

      Here is the RBC CEO saying the rate hikes are coming faster than people think, along with the rate of

      https://www.bloomberg.com/news/articles/2021-03-09/rbc-ceo-mckay-sees-inflation-prompting-rate-increases-next-year

      “yuck, yuck leave it to the CEO of the largest bank in Canada to see 4 hikes in a year.” What does he know, right? He probably doesn’t even own a condo. 🙄

  • flipg 2 months ago

    Government manipulation of the market created a Ponzi style debt based totally nonproductive economy in which the rich get richer. Savers subsidize debtors. Money is stollen from savers through Financial Repression and Quantatative Easing… to buy votes from special interest groups.

    Savers hope for a return to honest interest rates. Debtors pray for interest rates to fall. Whatever happens will destroy the faux economy.

    Years ago my Older Brother said “Criminal Gangs control the Government. Their job is to divert as much money as possible to their buddies.” Then I thought he was cynical. Now I wholeheartedly agree.

    After we throw Corrupt Politicians out of Office they receive their Payoffs: subsequent rewards from the Business World. They become Members of the Board, Keynote Speakers, Key Opinion Leaders, publish mostly ghost written memoirs, flog extremely valuable sometimes ghost painted artworks…. While the general populace struggles

  • Chess Coaching 2000 ELO 2 months ago

    Real Estate has been very slow lately so I believe that it’s the opposite, the mortgage rates will go down. Time will tell.

  • DDD 2 months ago

    I want to see it rising up to 4%, more rational.

  • Mandeep 1 month ago

    Mortgage rates will probably go down this year.lets see

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