Will Fixed Mortgage Rates Keep Falling? My Take on the Current Trends
When it comes to fixed mortgage rates, the consensus seems optimistic—they’re expected to fall. But from where I’m sitting, the picture is far less certain. Let me explain why.
A Quick Recap of Where We Stand
The Bank of Canada (BoC) aggressively raised its policy rate post-pandemic to combat soaring inflation. Now, with inflation cooling back to normal levels, the BoC has pivoted. It has already cut its policy rate from 5.0% to 3.75%, but even at this level, the rate is still restrictive, holding back demand.
Experts agree that the BoC will continue cutting, with predictions of another 1.00% to 1.50% in reductions. This narrative has driven expectations for lower mortgage rates, particularly for variable-rate mortgages, which are directly tied to the BoC’s policy rate.
But there’s a critical distinction to be made: fixed mortgage rates—the choice for most Canadians—don’t move in lockstep with the BoC’s cuts. Instead, they are tied to Government of Canada (GoC) bond yields, which operate on a different set of influences.
What’s Driving Fixed Mortgage Rates?
GoC bond yields are heavily influenced by their US Treasury counterparts, and that’s where things get interesting.
US Treasury yields have been rising, driven by shifting market sentiment south of the border. Investors are starting to doubt whether US inflation will cool as quickly as previously thought. Recent US inflation data showed a slight uptick, with October’s numbers rising to 2.6%, up from 2.4% in September.
This has led to a shift in expectations for the US Federal Reserve’s rate-cut timetable, with markets now pricing in a slower pace of reductions. As US Treasury yields climb, they pull GoC bond yields along with them.
For this reason, even as the BoC continues to cut its policy rate, fixed mortgage rates in Canada could rise, not fall.
What Does This Mean for Borrowers?
For homeowners and buyers waiting for lower fixed rates, this dynamic introduces real uncertainty. Many borrowers assume they’ll be able to lock in a lower fixed rate in the near future, but that strategy might not pan out as expected.
Here’s what you need to know:
GoC bond yields are forward-looking: They already account for widely anticipated BoC rate cuts. This means that for fixed mortgage rates to drop further, we’d need an unexpected economic catalyst—like a sharp economic slowdown or weaker-than-expected inflation data.
The influence of US Treasury yields: If US bond yields continue to climb, they’ll likely push Canadian bond yields higher too, putting upward pressure on fixed mortgage rates.
The gap between fixed and variable rates may narrow: As the BoC continues to cut rates, variable mortgage rates are likely to drop. At the same time, rising bond yields could stabilize or even increase fixed mortgage rates, closing the gap between the two.
What Should Homebuyers and Homeowners Do Now?
If you’re holding out for lower fixed mortgage rates or relying on the ability to switch from a variable to a lower fixed rate mid-term, it’s time to reassess your strategy.
Here are some key takeaways:
Variable-rate borrowers: With more BoC cuts on the horizon, variable rates are expected to fall further. However, keep in mind that rate cuts are already priced into the market, so additional savings may be gradual.
Fixed-rate borrowers: If you’re considering locking in, don’t wait too long. Current fixed rates are already near their lowest levels of the year, and the potential for them to rise is higher than many expect.
First-time buyers: If you’re in the market for a new home, the CMHC changes coming in December 2024 could expand your purchasing options. However, with demand likely to increase, acting sooner rather than later could help you lock in a favorable rate and avoid rising home prices.
The Bigger Picture: What Could Change?
While I believe fixed rates are more likely to rise in the near term, surprises can and do happen. An unforeseen economic slowdown or a drop in US inflation could reverse the current trend and lead to falling GoC bond yields.
But waiting for the perfect scenario comes with risks. If you’re in the market now, it’s crucial to weigh the current conditions and make a decision that aligns with your long-term financial goals.
The Bottom Line
The Bank of Canada’s ongoing rate cuts are good news for variable-rate borrowers, but fixed mortgage rates are influenced by a different set of factors—primarily GoC bond yields and their connection to US Treasury yields.
With US yields climbing and Canadian bond yields following suit, fixed mortgage rates may not fall further and could even rise. Meanwhile, the gap between fixed and variable rates is expected to narrow as the BoC continues its easing cycle.
If you’re navigating these uncertain times, now is the moment to review your mortgage options and develop a strategy that fits your needs. Don’t hesitate to reach out—I’m here to help you make the most informed decision.
Your Friend in the Mortgage Business,
Adam Walker
Walker Mortgages
226-567-4274 ext. 1
[email protected]
