Mortgage rates have been on a rollercoaster ride over the past few months, influenced by economic data ranging from inflation reports to employment numbers. However, as the dust begins to settle, we may be approaching a calmer period for rates—or perhaps the calm before another storm.
After enduring several economic data points, bond yields have recently found some stability, closing last week at a notable low. With a lighter economic calendar in Canada for the next couple of weeks and U.S. inflation numbers expected to hover around consensus levels, there is little on the immediate horizon to push yields back up. But as with all markets, things can change quickly, especially as we head towards mid-September when the economic data flow picks up again.
Canada’s 5-year bond yield, a key driver of fixed mortgage rates, is hovering near critical support levels. If bond yields break lower, we could see them fall to the 2.40%–2.50% range, which would push mortgage rates down further. However, for yields to drop significantly below that, Canada would likely need to experience an economic downturn, which doesn’t appear to be in the cards at the moment.
Nevertheless, in the short term, there’s a reasonable chance that bond yields—and by extension, mortgage rates—could dip by another 10 to 20 basis points. If economic data continues to surprise on the dovish side, that drop could extend to 30 or even 40 basis points. But at some point, the rate-cutting cycle will hit a wall, and the era of falling rates will start to reverse.
Fixed vs. Variable: Which Path to Take?
For homeowners and prospective buyers, the question remains: should you lock in a fixed rate now, or take a leap of faith with a variable rate? Both the Bank of Canada and the U.S. Federal Reserve have signaled that they plan to cut rates by over 100 basis points in the coming months. Historically, the first 100 bps of rate cuts are the easiest, but as inflation readings start to normalize in 2024, further disinflation could prove more difficult.
The irony is that many Canadians are sticking with fixed rates just as variable rates start to become more attractive. Floating your mortgage rate often makes the most sense at the beginning of a rate-cut cycle, yet borrowers continue to gravitate towards the security of fixed rates. This is especially true for those who are risk-averse and prefer the peace of mind that comes with knowing exactly what their mortgage payments will be over the term.
For those interested purely in minimizing interest costs, variable rates tend to win out on paper. For example, a borrower with a $500,000 mortgage over a 25-year amortization could pay approximately $10,000 more in interest over three years by choosing a fixed rate versus a variable rate, based on current forward rate projections.
Yet, fixed rates—especially shorter-term ones—are still enticing. Some lenders are now offering 3-year fixed rates as low as 3.99%, with additional incentives such as $2,500 cash back. While these offers may sound appealing, they don’t always result in long-term savings when compared to a variable rate.
If you’re a well-qualified, risk-tolerant borrower, now might be the time to seriously consider a variable rate. The numbers suggest it could be the more cost-effective choice, especially if rate cuts materialize as expected. But for those who value predictability and peace of mind over potential savings, fixed rates will likely continue to be the go-to option.
As always, it’s essential to evaluate your individual financial situation and risk tolerance. Whether you choose to float or fix, understanding the road ahead for rates will help you make a more informed decision. Here at Garland Mortgage Solutions, we’re ready to guide you through these changes, ensuring you make the most out of the opportunities that come with them. Stay tuned, stay informed, and let’s navigate this promising financial landscape together.
