Canadians across the country are itching to buy or trade up for a new home. However, interest rates are holding many buyers back. Earlier this month, the Bank of Canada decided not to lower its key interest rate. It’s the fifth time in a row that the central bank has kept its rate at 5.0 per cent. The hold was expected because the bank is waiting to ensure inflation is under control.
“We’ve come a long way in our fight against high inflation. Monetary policy is working – inflation is coming down. But it’s too early to loosen the restrictive policy that has gotten us this far,” Bank of Canada Governor Tiff Macklem said.
The Bank of Canada’s rate is reflected in the interest rates Canadians pay on their debt, including mortgages. But while everyone waits for mortgage rates to come down, housing prices are increasing again post-pandemic.
The latest numbers from the Canadian Real Estate Association show that the average price of a home in Canada in January was $659,395 – an increase of 7.6 per cent in the past year.
Despite government incentives like the First Home Savings Account, buyers are waiting. The math is simple: Higher interest rates equal higher mortgage payments.
With the current economic situation, potential buyers wonder if the rates will ever ease. We asked Kellie Bonnici, Mortgage Agent with The Mortgage Group in Peterborough, Ontario, for her take on the current market and where it’s headed.
Q: What is the main difference between the two types of mortgage rates?
There are two kinds of rates – fixed rates and variable rates – and they change in response to different stimuli. Fixed rates are closely tied to government bond yields, and change at any time. Variable rates respond more directly to the Bank of Canada’s scheduled rate announcements, which in turn affects the prime rate of the major banks. Variable rates are expressed as a discount on prime, for example, prime minus one per cent, which in today’s environment results in an interest rate of 6.2 per cent.
The Bank of Canada’s regular announcements, made every month and a half or so (on a published schedule), include their overnight rate. It’s the overnight rate that affects bank prime, and bank prime is what variable rate products are tied to. The most common variable rate products are variable rate mortgages and lines of credit.
The prime rate is currently 7.2 per cent, which is quite high in relation to where it was two years ago. During the pandemic, it was 2.45 per cent. It’s gone up a lot more than was expected.
Q: The March 2024 Bank of Canada announcement was a hold. Is this what we can anticipate seeing going forward?
It’s widely expected that variable rates will start coming down this year. Current consensus is for decreases starting in the summer or fall, with cuts between one and two points over the next year or two. Interest rates respond to real-time events, so they can be hard to predict. I’m hopeful that we’ll start to see decreases in the summertime.
Q: What about fixed rates?
The majority of homeowners end up in fixed-rate mortgages, and those rates are already going down. In fact, they’ve been going down since last fall. Fixed rates respond to government bond yields, which are changing minute to minute, so they’re changing all the time. For example: we had some fixed rates with major lenders that were as high as 6.59 per cent. Those same rates are already down a full percentage point, to 5.59 per cent.
I think the thing that new homeowners have to keep in mind is the idea of ‘date the rate and marry the price.’ There’s a really close relationship between rate and price. As we’ve recently seen, when rates are high, prices go down. Rates go down, prices go up.
Would you rather have a temporarily high rate or a much bigger loan to pay off? You’re better off with a higher rate and lower mortgage balance than vice versa.
Q: Would you say the market is starting to heat up again?
I think a lot of people are tired of waiting and getting comfortable with coming off the sidelines. I know things have gotten really busy for me this spring. A lot of the realtors I work with, things are busy for them as well. So, I think things are starting to shift. January was a busy month, compared to the few months previous.
Q: What should someone do if they have a fixed mortgage that’s coming up for renewal? Should they sell or refinance?
I would say people should avoid selling unless they have no other choice. Look at other options. Can they get a better paying job? Can they rent out their basement or find other ways to increase their income before considering selling? The rental market is tight, and it’s a lot more secure to be in a home that you own rather than a home that you might have to vacate if the owner wants to move in. There’s a lot of security in home ownership.
Refinancing can be a way to get your costs down. If you’re currently in a mortgage that has 20 years left, you can refinance back to 30 years to reduce your monthly payment. There’s a trade-off, of course: You’ll pay more interest over the life of the mortgage, but if the goal is increasing monthly cash flow, then refinancing is the way to go.
Q: Any advice for those with investment properties and mortgages coming up for renewal?
My perspective is that refinancing is almost always a better bet than selling. If you sell an investment property, you’re subject to capital gains, whereas if you refinance, the interest that you pay is tax-deductible. And you can continue to refinance that property, extract the equity and use it for other investments. To me, rental properties are worth more in someone’s portfolio than if they’re sold. Every situation is unique of course, and the longer someone has owned a property the more selling could make sense.
Q: So, it’s a good bet that rates will trend down this year?
As mentioned, fixed rates have already been going down. When the Bank of Canada is confident that inflation has cooled for long enough, it should decrease its overnight rate. If we see an uptick in inflation, which seems highly unlikely given the economic environment that we’re in, that could change things, but given the current situation I don’t foresee that happening.
It’s important to note that the Bank of Canada would be hesitant in timing their overnight rate cut with the spring market because that would unleash absolute mayhem with both pent-up demand and lack of supply. Any rate cut will likely happen later in the year.
