Recent trends have shown a drop in interest rates, benefiting both existing homeowners and new homebuyers. This decline follows the recent Bank of Canada interest rate cut, which has lowered rates for variable-rate mortgage holders and triggered reductions in fixed-mortgage rate pricing due to a significant decrease in bond yields.
Last week, Government of Canada bond yields, which play a crucial role in determining fixed mortgage rates, dropped by 36 basis points before experiencing a slight recovery. As a result, mortgage providers across the country responded by reducing their fixed mortgage rates by up to 25 basis points (0.25%). These reductions were seen across various terms, particularly in 3- and 5-year terms.
The drop in rates can be attributed to several factors, including the recent Bank of Canada rate cut, an increase in bank mortgage default rates, and weakening economic indicators such as slower-than-expected GDP growth and easing inflation.
Although fixed rates have fallen recently, they are still about 20 basis points higher than at the beginning of the year. The term “range-bound” aptly describes the latest rate movement. Future rate trends will largely depend on the direction of inflation. If inflation continues to decrease, it will support higher bond prices and lower yields, but a resurgence in inflation could reverse this trend.
While many lenders have promptly lowered their rates, the Big Banks have remained largely silent, with posted special rates staying virtually unchanged over the past month, aside from some discretionary pricing. This cautious approach can be linked to the banks’ focus on recovering from significant loan losses experienced over the past six months.
The delay in rate reductions from the big banks could be due to their desire to see if the recent changes are a temporary reaction to the Bank of Canada rate cut or if they are more sustained. If the rate cuts persist, it’s expected that the big banks will follow suit and lower their rates in the coming weeks.
Future Rate Predictions
Although the general trend suggests a decline in rates, the path is expected to be uneven. Borrowers can anticipate a bumpy decline, eventually leading to lower rates than today. However, it’s unlikely that mortgage rates will drop below 4% this year.
At present, the lowest nationally available mortgage rate is 4.59% for a 5-year fixed default-insured mortgage, applicable for those with a down payment of less than 20%.
With the expectation that rates will continue to decline, some borrowers may hesitate to lock in a 5-year fixed mortgage rate. This raises the question of which mortgage term currently offers the best value.
One option is a 3-year fixed mortgage, available at rates as low as 4.84% for default-insured mortgages and 5.19% for conventional mortgages. While variable rates are often preferred for their long-term benefits, the current spread between fixed and variable rates makes fixed terms more attractive at this time.
For a variable-rate mortgage to be advantageous, it would require multiple additional rate cuts beyond the recent one to break even. This could result in variable-rate borrowers paying more initially, hoping for lower rates in the future. Moreover, banks and lenders often do not fully pass on the benefits of rate cuts, especially if they face increasing mortgage losses.
