Rates on some fixed mortgages have dropped by a full percentage point in the past few months, opening up an opportunity for Canadians eyeing the spring housing market or with a mortgage of their own up for renewal.
While experts say there’s little downside to securing a cheaper rate today, committing to a long-term mortgage with rate cuts in the forecast might end up costing some households more.
Before the end of 2023, the lowest rate available on insurable five-year fixed rate mortgages dropped below five per cent, the first time it fell below that benchmark since last spring.
As of Thursday, rates as low as 4.84 per cent were available for that same product at multiple Canadian lenders, according to James Laird, co-CEO of Ratehub.ca.
That’s down more than a percentage point from highs seen last fall, Laird tells Global News.
Since late October, there’s been a shift in sentiment within the bond market that informs what rates banks offer on mortgages and other loans, he says.
As the Canadian economy has weakened and inflation has shown signs of cooling, forecasters are shifting their expectations for the Bank of Canada’s policy rate from “higher for longer” to now thinking “rate cuts are coming sooner rather than later,” Laird says.
That’s driven down yields on products like the government of Canada’s five-year bond in recent months — the key benchmark for fixed-rate mortgages of the same length.
The popular five-year fixed product is not the only mortgage seeing cheaper rates to start the new year. Mortgage Outlet COO and broker Leah Zlatkin notes that three-year fixed mortgages are also down from recent highs, floating just above the five-per cent market.
“It is a really good time to get a lower (fixed) interest rate than you would’ve been getting for the last year,” she tells Global News.
But Zlatkin also warns that there are risks out there that could “quell” the easing in the bond market.
Get the latest Money 123 news.
Sent to your email, every week.
Because yields — and by extension, fixed mortgage rates — are tied to expectations for the Bank of Canada’s policy rate, anything that pushes back forecasts for eventual rate cuts could send fixed rates in the market back up.
Inflation could stay elevated, for example, keeping the central bank from easing rates. Such a move would limit activity in the housing market as fewer people qualify for rates they can afford, Zlatkin says.
Laird says the easing in the bond market today is “almost deja vu” from last year, when the Bank of Canada announced a “conditional pause” in its rate hike cycle.
At that time, market watchers began to speculate that rate cuts were on the horizon, bringing down yields and fuelling a spring thaw in the cooling housing market. But those hopes were cut short in June and July when the Bank of Canada returned with back-to-back rate hikes, and the bond market saw yields surge soon after on the “higher for longer” mentality.
Laird warns that any number of global events or inflation snags not yet in the forecasts could affect the Bank of Canada’s timeline for rate cuts.
For that reason, there’s “never a downside” for Canadians who are thinking about getting a mortgage for the first time, or who have one coming up for renewal in the months ahead, to get a rate hold now when the market is easing.
By inquiring with a mortgage professional, you can secure a rate at today’s prices, typically for 120 days in advance of when you need it. If bond yields continue to ease and rates drop further, you can take advantage of the new rates right up until you sign for the new mortgage; if the trend reverses and rates rise, you’re similarly protected, Laird notes.
“It’s a free insurance policy,” he says.
The 4.84 per cent rate available on most comparator sites is open largely to homeowners or buyers with an insurable mortgage, Laird says, where lenders can afford to offer the most competitive rates.
Zlatkin says that for those with mortgages up for renewal in the first half of 2024, now is the time to get documents in order and reach out to a broker or other professional to kick off the renewal process.
An existing lender is likely to offer a competitive five-year fixed rate at renewal, but will be more inclined to negotiate a lower rate if you’re working with a broker to put another offer on the table, she says.
There’s another option for mortgage consumers to consider, Zlatkin notes. Variable-rate mortgages are currently more expensive than most fixed-rate options, as they’re tied to lenders’ prime rate, which itself is informed by movements in the Bank of Canada’s policy rate.
Currently, five-year variable rate options are priced around 6.2-6.7 per cent, Zlatkin says. But if forecasts are to be trusted that the central bank rate is going to decline, those with a variable mortgage could see their rate drop in concert with those cuts.
Depending on the type of payments involved in their mortgage, a household could see their payments start higher but drop as the rate cycle eases if they were to take out a variable rate.
There are plenty of risks that come with this approach — as happened last year, rates could still rise rather than decline in the year to come — but Zlatkin notes that if rate cuts do materialize, a variable rate holder could pay less than someone with a fixed rate over the same timeframe.
“Consumers in the marketplace should start pricing that into their considerations,” she says.
Laird says that based on activity on Ratehub’s mortgage pricing and leads tools, there seems to be “early” interest among buyers ahead of the traditionally busy spring housing market.
Coming off of a very cool winter season, which saw few active buyers and some would-be sellers forced to shelve their plans for the new year, Laird predicts the housing market is due for a “strong start to the year.”
“There should be a lot of pent-up demand, just because there weren’t a lot of transactions last year,” he says.
