The Canadian Housing Market Is A Multifaceted Entity That Has Recently Encountered An Intriguing Development: A Rise In Fixed Mortgage Interest Rates.
This information may be disquieting for those renewing their mortgages or prospective homebuyers. However, fear not! In this rising-rate environment, this blog serves as your invaluable resource, guiding you through fixed-rate increases and helping you secure the best mortgage offer in Canada.
Fixed mortgage rates are intricately tied to the Bank of Canada’s overnight lending rate and government bond yields. Lenders follow suit when the Bank of Canada raises its rate, pushing higher fixed mortgage rates. Similarly, as government bond yields rise, lenders adjust their fixed mortgage rates based on these benchmarks.
Why Are Fixed Rates Rising In Canada?
There are several factors which are contributing to the current rise in fixed rates:
- Monetary Policy: The Bank of Canada has steadily raised interest rates to combat inflation. These hikes directly impact fixed mortgage rates.
- Bond Market: Recent volatility in the Canadian bond market has pushed yields upwards, leading lenders to adjust their fixed mortgage rates accordingly.
- Global Economic Factors: Global economic uncertainty can influence Canadian interest rates and bond yields, impacting fixed mortgage rates.
Here is a list of a few significant international factors:
- US. Federal Reserve Rate Hikes: The aggressive interest rate hikes implemented by the U.S. Federal Reserve to combat inflation have repercussions on international markets, including Canada. Investors pursue higher returns as the United States raises interest rates, resulting in capital outflows from Canada and increased Canadian bond yields. Consequently, Canadian lenders must increase fixed mortgage rates to preserve their profit margins.
- Geopolitical Tensions: The ongoing trade disputes and conflicts can create significant unpredictability, shaking investor confidence. This could lead to a surge in demand for safe-haven assets like government bonds, potentially depressing bond yields and impacting fixed mortgage rates in Canada.
- Supply Chain Disruptions: Building materials are among the industries significantly impacted by the persistent disruptions in global supply chains. This may increase construction expenses, affecting housing prices and the overall mortgage market.
For potential borrowers, understanding the complex interplay between these global factors, domestic economic data, and the monetary policy of the Bank of Canada is crucial. This knowledge empowers you to accurately assess potential future volatility in mortgage rates, putting you in control of your financial decisions.
Moreover, The Bank of Canada influences short-term interest rates, including the Canadian Overnight Repo Rate Average (CORRA), to control inflation. Understanding CORRA can provide additional insight since broader interest rate trends influence fixed mortgage rates.
Fixed vs. Variable Rates: The Battle Rages On!
The decision between a fixed or variable-rate mortgage depends on your circumstances and risk tolerance.
| Fixed Rate | Variable Rate |
| Offers predictability and peace of mind. You lock in an interest rate for a set term (often 3, 5, or 7 years), shielding yourself from future rate increases. However, you may miss out if rates go down during your term. | This fluctuates with the prime rate set by central banks. It can be attractive if you believe rates will remain steady or decrease, but it also carries the risk of significant increases. |
Here’s a breakdown of how these factors might influence homebuyers in different situations:
- JOHN AND SARAH, THE STABILITY SEEKERS
John and Sarah are a young couple planning to buy their first home in Toronto. They have stable jobs and prioritize predictability in their monthly payments. They are risk-averse and concerned about potential interest rate hikes.
Decision: Fixed Rate Mortgage
REASONING: John and Sarah prioritize stability over potentially lower initial rates with a variable option. With a fixed rate, they know exactly what their monthly payments will be throughout the term, allowing them to budget effectively and plan for the future. They’re comfortable sacrificing a lower initial rate for peace of mind.
- DAVID AND EMILY, THE RATE GAMBLERS
David and Emily are a financially savvy couple planning to purchase a condo in Vancouver. They have a significant down payment and believe interest rates may remain steady or decrease soon. They’re comfortable with some risk and prioritize getting the lowest possible initial rate.
REASONING: David and Emily believe they can utilize the current lower variable rates. They plan to sell their condo within the initial fixed-rate period (typically 5 years) and avoid any penalties for breaking a fixed-rate mortgage. Their financial situation allows them to absorb potential future rate increases if necessary.
John and Sarah’s scenario showcases the benefits of a fixed-rate mortgage for those who prioritize stability and dislike surprises. David and Emily’s scenario highlights the potential advantages of a variable-rate mortgage for borrowers with a high-risk tolerance and a short-term ownership plan. The best option always depends on your circumstances and risk tolerance. Consider consulting a qualified mortgage broker who can assess.
However, Each type has its characteristics and considerations, which are essential to understand before deciding.
| Feature | Fixed-Rate Mortgage (30 years) | Variable-Rate Mortgage (5 years initial fixed, then adjustable) |
| Initial Interest Rate | 5.50% | 4.80% |
| Monthly Payment (Year 1) | $2,200 | $1,900 |
| Interest Rate Changes | None | May adjust after year 5 and every year after that |
| Potential Payment Changes in a Rising Rate Environment | None | May increase significantly if interest rates rise |
| Stability | Offers stability with predictable monthly payments. | It may start lower but can change, leading to payment variations. |
| Market Dependency | Independent of market fluctuations, providing security. | Dependent on market rates, exposing borrowers to risk. |
| Budgeting | Facilitates accurate budgeting with constant payments. | Requires flexibility in budgeting due to potential rate changes. |
| Risk | Shielded from market volatility, offering peace of mind. | Exposes borrowers to potential rate increases, increasing risk. |
HENCE, WITH FIXED RATES ON THE RISE, IS A VARIABLE RATE THE ANSWER?
Not necessarily. While variable rates may be lower, they can be susceptible to sudden spikes, potentially impacting your monthly payments significantly.
- CHOOSE FIXED IF: You prioritize stability and dislike surprises. You have a budget that can’t handle fluctuating monthly payments.
- CHOOSE VARIABLE IF: You believe interest rates will remain low or decrease shortly. You have a high tolerance for risk and are comfortable with potential payment fluctuations.
HERE’S THE BREAKDOWN OF FIXED MORTGAGE TERM OPTIONS IN CANADA
| Term Length | Interest Rate | Flexibility | Early Repayment Penalty | Suitable For |
| Short-term (2-5 years) | Typically, a lower initial rate | More flexibility to refinance if rates drop | May apply | Those who want to lock in a lower rate initially may refinance later or plan to move in the shorter term. |
| Mid-term (No specific range mentioned) | Balance of rate and predictability | Less flexibility to refinance compared to shorter terms | May apply | Those who seek a balance between initial rate and stability and are comfortable with the possibility of rates rising in the future. |
| Long-term (7-10 years) | Typically, a higher initial rate | Less flexibility to refinance | May apply (potentially significant) | Those who prioritize predictability and want to lock in a rate for longer, especially if rates are expected to rise significantly. |
Mortgage Calculator:
While the table above offers a general comparison, it’s crucial to consider your specific financial situation and risk tolerance. To get a more personalized idea of potential monthly payments under different scenarios, use our interactive mortgage calculator to compare how different interest rates could affect your monthly payments. Simply enter your loan amount, term, and potential rates for detailed comparisons. This will help you visualize the impact of rising fixed rates on your budget.
Securing The Best Deal: Strategies For Today’s Market
Even with rising fixed rates, there are still ways to get a great mortgage deal in Canada.
- Shop Around: Don’t just settle for the first rate you see. Compare offers from different lenders, including banks, credit unions, and mortgage brokers.
- Consider a Shorter Term: Opting for a shorter fixed-rate term (e.g., 3 years) can lock in a lower rate than longer terms (e.g., 7 years) that may reflect anticipated future rate hikes.
- Improve Your Credit Score: A higher credit score qualifies you for better interest rates. Focus on paying bills on time and maintaining a low credit utilization ratio.
- Increase Your Down Payment: A larger down payment reduces your loan amount, making you a more attractive borrower and potentially lowering your interest rate.
- Work with a Mortgage Broker: A good mortgage broker can negotiate on your behalf and find you the best rates from their network of lenders.
- Beyond Rates: Important Mortgage Considerations
While interest rates are crucial, they’re not the only factor to consider when choosing a mortgage. Here are some additional points to keep in mind:
- Prepayment Options: Choose a mortgage that allows you to make lump sum payments without penalty. This will enable you to pay down your principal faster and save on interest in the long run.
- Closing Costs: Factors in closing costs, such as lawyer and appraisal fees, when comparing mortgage options.
- Stress Test: You should qualify for a mortgage amount you can comfortably afford, considering the Bank of Canada’s stress test, which uses a higher interest rate than your offered rate.
Government Of Canada Bond Yields: The Driving Force
The Government of Canada issues bonds, essentially borrowing money from investors. The bond yield represents the return investors receive for lending their money to the government. When setting fixed mortgage rates, lenders closely watch these yields, particularly the 5-year bond yield. The trend in bond yields signals to lenders that they can offer lower fixed mortgage rates while maintaining their profit margins.
Budget 2024: Increased Spending Vs. Revenue Windfall
The recent budget outlines significant new spending across various sectors, including housing and infrastructure. This increased spending could put upward inflation pressure, potentially prompting the Bank of Canada to raise interest rates further to control inflation. The budget’s effect on the housing market also needs to be clarified. The budget includes steps to increase housing supply, like funds for infrastructure and minimizing rules. It also gives the business more support. In the short run, this could cause more people to want to buy homes, pushing prices up.
It’s hard to say what will happen with interest rates and the housing market in 2024 because of how the Federal Budget, inflation, and the Bank of Canada’s monetary policy affect each other. For a better picture, keeping an eye on economic statistics and the Bank of Canada’s announcements will be necessary.
Expert Opinions
● Randall Bartlett, senior director of Canadian Economics with Desjardins Group, estimates that the fiscal year ended March 31 deficit could be around C$47 billion, led by government expenses. He stated, “We are committed to adhering to those guideposts. We recognize that Canada today needs our government to invest… And that requires the federal government to step up.”
● Scotiabank Economics believes the additional spending might lead to the Bank of Canada delaying potential interest rate cuts. Meanwhile, Deloitte’s Future of Canada Centre suggests the budget’s impact on interest rates might be minimal, with inflation remaining the primary driver of the Bank of Canada’s decisions.
The Bottom Line
Understanding the factors affecting rates is crucial in navigating a rising fixed-rate environment. By gaining this knowledge, you can carefully evaluate fixed vs. variable options, shop for the best offers, and secure a great mortgage deal in Canada. Remember, feel free to negotiate and seek help from a qualified mortgage broker. With a little effort, you can turn a potentially stressful situation into a positive step towards homeownership, feeling informed and knowledgeable.
