2022-11-03 | 11:39:21

What’s Happening with Mortgage Rates?

OK, we know mortgage rates have been increasing for most of this year.  What has caused this, and what’s in the future?  I know you’re a very knowledgeable reader, but a little bit more knowledge could be useful.  This is a pretty short read, hope you find it useful. 

Prime Rate & Variable Rates

Prime rates drive variable rate mortgages, as well as Lines of Credit and some bank loans.  What is the government’s biggest fear?  Inflation.  What is the biggest tool they have to fight inflation?  The Bank Rate (technically the Overnight Rate), which is directly linked to the Prime Rate that lenders use when pricing variable rate mortgages and Lines of Credit.

Inflation is the highest it’s been in 30 years, so the Bank of Canada (BoC) has to keep hiking the Prime Rate until inflation is under control.

When will they stop increasing the Prime Rate?   After the October rate hike (Prime is currently 5.95%) there will very likely be another one in December.  It is felt that nothing else will happen early in 2023, but the BoC is prepared to push Canada into recession if need be.  As the Deputy Governor of the BoC (Paul Beaudry) stated earlier this year “History shows that once high inflation does become entrenched, it’s hard to bring it back down without hurting the economy.”

Fixed Mortgage Rates

They have risen considerably since Q1, and current best 5Y fixed rates are around 5%.  This time last year they were around 2%.  What has prompted this increase?  Fixed mortgage rates are based on yields from government bonds, and when bond yields increase this causes fixed mortgage lenders to raise their rates.  The money they lend comes from capital markets, so higher costs to them means higher mortgage rates for us.

What’s causing bond yields to increase?  The usual things i.e. oil and natural gas prices, inflation (there it is again), political instability home and abroad plus disruption to the world economy by natural disasters or wars.  As the war in Ukraine shows no sign of abating, expect bond yields to stay high for some time, hence fixed mortgage rates will likely not move significantly down again until the potential recession of 2023.

The Future

It’s partly been covered above, but my prediction is for the Prime Rate to move up once by Year-End 2022, but not to change again until we’re in a 2023 technical recession, after which the BoC will start reducing the Prime rate.

Fixed rates (based on bond yields) are harder to predict, but I feel they will stay at the current level until early 2023, and then let’s see what effect a recession has on them.

If you have any questions after reading this, please reach out; I’d love to hear from you.