Don't expect Canadian mortgage rates to see a big decline anytime soon
A rollercoaster ride for Canadian mortgage rates has continued in the past week as global financial market nerves over rising US debt sent bond yields – and some lenders’ fixed rates – higher.
Those yields have since dipped slightly, although ongoing uncertainty about the future for Canada’s economy has left borrowers and brokers in the dark about where fixed rates are headed next.
Meanwhile, a concerning uptick in core inflation last month appeared to strengthen the likelihood that the Bank of Canada will leave its benchmark rate unchanged when it meets next Wednesday (June 4).
Monoline lenders led that move towards higher fixed rates last week and will probably be in no rush to bring them lower again amid the current market volatility, according to RATESDOTCA mortgage and real estate expert Victor Tran.
He told Canadian Mortgage Professional lenders would likely adopt a wait-and-see approach on bond yields as financial markets gear up for that central bank decision.
“A bunch of lenders increased their fixed rates last week but because the yields are coming back down now, I can’t imagine them being quick to react and start dropping rates again,” he said. “If anything, they’ll just keep these rates at a higher level for the time being and just really wait to see how far the yield is going to go down.
“It’s not a huge decrease since last week. But who knows? [US president] Trump can say something else and things will completely change in a matter of hours.”
Fixed-rate jump complicates matters further for stretched buyers
Fixed rates didn’t exactly shoot through the roof last week, with the biggest increases ranging between 10 and 15 basis points. That’s not a huge surge – but it marked unwelcome news for homebuyers already on the margins hoping to nudge a deal over the line.
“It’s not a whole lot [of an increase], but for a lot of people trying to enter the housing market that could pretty much make or break their deal,” Tran said.
Stress test rates – which require borrowers to show they can afford a mortgage payment of 5.25% or two percentage points above their contract rate, whichever is higher – also ticked upwards in line with that fixed-rate increase, further lowering the buying power of plenty of hopeful buyers.
Affordability remains a huge challenge in the housing market, especially in pricier cities like Vancouver and Toronto, and even a small adjustment in lenders’ best offered rates can have huge repercussions for buyers.
“There’s a lot of people that do rely on borrowing the maximum possible with income ratios at the very max that the lenders allow,” Tran said. “So even a 10-, 15-, 20-basis-point increase on the rate could really kill the deal right then and they may not be able to get into the house that they want.”
Fixed rates remain more popular than variable in current market
Even despite last week’s rise in fixed rates, they remain essentially on a par with lenders’ best variable options and most borrowers are still gravitating towards the security they offer, according to Tran, because of the substantial economic turbulence currently at play.
The Bank of Canada is still expected to pencil in rate cuts for the remainder of the year, sending variable rates lower, but stubborn inflation and the unpredictability of the ongoing Canada-US trade war could mean fewer reductions than originally anticipated.
“We all hoped that rates would be a lot lower by now, but with Trump in office there’s just too much uncertainty,” Tran said. “People don’t want to deal with that, and going for a fixed rate could be a safer bet – especially since it’s pretty close to what the variable rate is right now.
“There’s still talk that the Bank of Canada will continue to decrease the overnight rate, but it doesn’t sound like it’s going to be as much as what people hoped for. And I think people just prefer certainty over gambling and potentially saving more money down the road.”
Source CMP
By Fergal McAlinden
