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Highlights from the Bank of Canada's December 6, 2023 announcement

On December 6, 2023, the Bank of Canada kept its target for the overnight rate unchanged at 5.00% for the third time in a row.

• A number of key economic indicators paved the way for the Bank of Canada to hold rates yet again, including weaker-than-expected Q3 GDP data, slowing consumer spending and, most importantly, declining inflation.
• Canadians with variable-rate mortgages and home equity lines of credit (HELOC) will be pleased to see rates continuing to remain stable, and can now start looking to potential rate cuts on the horizon.
• Although fixed mortgage rates are not directly affected by the Bank of Canada’s rate hold, the bond market has cooled in reaction to today’s announcement, meaning that fixed mortgage rates could well come down in the near future.
• Canadians looking to buy a home or whose mortgage is up for renewal should get a rate hold now to protect themselves against any future rate increases. Should mortgage rates (namely fixed mortgage rates) go down during the time of your rate hold, you are still eligible for the lowest rate.
• Despite the good news nature of this announcement, there will likely be little immediate effect on the housing market due to the current expected seasonal slowdown. That said, anticipation of future rate cuts could lead to a rebound in the housing market in 2024.
  
  

November 2023 mortgage market update

The Canadian mortgage market has seen considerable volatility in recent months, and the first months of the fall are no exception. Surging bond yields have continued to put upward pressure on fixed mortgage rate pricing, while variable mortgage rates remain elevated following the Bank of Canada’s June and July rate hikes that brought the target Overnight Lending Rate to 5%. If you're shopping for a mortgage rate in Canada right now, here are some economic factors you should be aware of.

Bond market update: After an autumn of historically elevated levels, Canadian bond yields have started to cool in response to recent rate holds from both the Bank of Canada and US Federal Reserve.

The five-year Government of Canada bond yield has moderated to the 3.7% range, down from the high of 4.4% witnessed in October – a 17-year record. This has paved the way for lower fixed mortgage rates, as lenders use bond yields to set the threshold for their fixed-rate product pricing. In the first week of November, a number of lenders decreased their fixed-rate offerings by roughly 30 basis points.

While it’s difficult to predict whether bond yields will continue to cool, a number of recent economic reports support the rationale for central banks to end their rate hiking cycles, such as softer-than-expected jobs and GDP reports. Inflation, which is a major factor behind rate hikes, is also starting to move in the right direction in Canada, with the CPI measure coming in at 3.1% in October. It is now virtually certain that the Bank of Canada will hold its trend-setting rate once more in its upcoming announcement on December 6th, with analysts increasingly forecasting rate cuts as early as the second half of 2024.

CPI update: The pace of inflation is one of the most closely-watched economic metrics, and helps the Bank of Canada determine its next step in regards to interest rates. The BoC uses its Overnight Lending Rate – also referred to as its benchmark or policy rate – to respond to inflation, with the goal of keeping it within a 2% growth target range. The BoC hikes its Overnight Lending Rate when inflation trends too hot, in efforts to chill spending and borrowing. In the case inflation – and overall economic activity – becomes too soft, the Bank will then cut its rate, in order to stimulate spending.

The latest Canadian consumer price index (CPI) data (released on November 21) for October 2023 shows headline inflation growth came in at 3.1%, roughly in line with economists’ expectations, and down from the 3.8% growth recorded in September. Month over month, CPI rose a scant 0.1%, following a decline by the same size in September, and 0.4% growth in August.

Softening gas prices were the largest contributor to the lower inflation number, falling -7.8%. However, factors such as mortgage interest costs and rents remain steeply high, rising 30.5% and 8.2% on an annual basis, respectively. Service prices are also continuing to put pressure on the CPI, rising 4.6% on a year-over-year basis following a 3.9% increase in September. Grocery costs, however,  decreased to 5.4% from 5.8% in September.

Another positive development was a dip in the Core inflation measures monitored by the Bank of Canada, which strip out the most volatile costs, such as gas and food. That dipped to 3.6%, down from 3.7% last month. Overall, the inflation numbers support another rate hold from the Bank of Canada in its upcoming announcement on December 5, marking the third time in a row the central bank has not changed rates, and ushering in continued stability for mortgage borrowers for the remainder of the year.

Read more: October CPI comes in at 3.1%, securing holiday rate hold

Real estate update: On November 15, 2023, the Canadian Real Estate Association released the statistics for the Canadian housing market for the month of October. According to the numbers, home buyer activity continued to decline into the autumn months, marking a much softer fall than is typical in terms of demand.

According to CREA, home sales dropped in the majority of markets across the country.

A total of 33,921 homes sold nationwide during October, marking a -5.6% decline from September, and relatively flat on an annual basis, with just a 0.9% increase year over year. The average Canadian home price rose slightly to $656,625, up 1.8% from the same time period in 2022, but roughly unchanged from the previous month.

Some 70,020 properties came to market during October, marking a month-over-month drop of -2.3% – the first time since March that this has declined. On an annual basis, though, new supply is still up by 16%.

As the decline in the number of sales still outpaced the decline in new listings, the  sales-to-new-listings ratio – which CREA uses to measure the level of competition in the market – dropped to a 10-year low of 49.5%. That firmly places Canada’s housing market in balanced market territory, and is down considerably from the high recorded this past April of 67.9%.

It’s expected that activity will remain low until at least the spring market, assuming the Bank of Canada lowers or keeps its benchmark interest rate unchanged.

Read more: Canadian real estate conditions drop to 10-year low in October

Factors that can affect your mortgage rate in Canada

It’s important to understand that the best mortgage rate you qualify for may change depending on your unique borrowing profile. Here are some of the factors that influence what mortgage rate you qualify for:

The type of mortgage: If your mortgage is for a refinance, rather than a purchase or renewal, you’ll be eligible for higher rates. For individuals with an existing mortgage who have good credit and more than 20% equity in their homes, in addition to refinancing, you can also explore a home equity line of credit (HELOC).

Your down payment: If you’re purchasing a home and your down payment is less than 20% of the purchase price and the value of the home you are purchasing is less than $1 million, you’ll be required to purchase mortgage default insurance (sometimes known as CMHC insurance). This insurance is added to your mortgage amount and, while it will cost you money, it will result in a lower mortgage rate as your mortgage is less risky for your lender. If you’re renewing your mortgage, in order to be eligible for the lowest mortgage rates you would have needed to purchase CMHC insurance on the original mortgage. 

Your intended use of the property: Your mortgage rate will be higher if you plan to rent your property out vs. live in it as your primary residence.

Your amortization period: Insurable mortgages (i.e. mortgages for homes valued at less than $1 million with a down payment of less than 20% of the purchase price) in Canada have a maximum amortization period of 25 years. Regardless of the price of your home, if you make a down payment of at least 20%, you are able to access a mortgage that allows a longer amortization period, such as a 30-year period. While longer amortization periods will usually result in a lower monthly payment, they can come with a slightly higher interest rate. Moreover, by taking longer to pay back the mortgage, you will pay more in interest overall than you would with a shorter amortization period.

How to choose between a fixed or variable mortgage rate in Canada

Variable vs. fixed mortgage rates

The difference between fixed and variable mortgage rates is whether or not they will change over the term of your mortgage. Fixed rates will stay the same over the course of your mortgage term (usually 5 years), while variable rates will change alongside changes in your lender’s prime rate.

Fixed mortgage rates:

Fixed mortgage rates are a historically popular option, with 5-year fixed mortgage rates accounting for nearly 80% of all mortgage requests made on Ratehub.ca from January to September 2023. The benefit of a fixed mortgage is that you are protected against interest rate fluctuations, so your regular payments stay constant over the duration of your term, regardless of what happens in the market. A fixed rate mortgage is ideal for you if you have a low appetite for risk. You’ll know how much you’ll be paying monthly right from the outset and not have to monitor interest rates.

Variable mortgage rates:

Variable mortgage rates are typically lower than fixed rates but can vary over the duration of your term. Variable mortgages are prone to market behaviour (via the prime rate) which affects your payments. That means your payment amounts can change over time. Variable rates remained substantially lower than fixed rates throughout 2021 and into 2022, leading a large number of buyers to opt for 5-year variable-rate mortgages. However, as variable-rate mortgages climbed to rates that are higher than fixed-rate mortgages over the course of ten rate hikes between March 2022 and July 2023, their popularity has substantially diminished.  

While variable rates are generally lower, they do fluctuate and can be viewed as more risky when compared to fixed rates. Moreover, variable rates have actually been higher than fixed rates since the end of 2022. That said, variable mortgage rates have some key advantages you should know about:

• You can convert a variable rate to a fixed rate at any time without a penalty as long as you stay with your original mortgage lender.
• Breaking a variable rate mortgage is substantially less expensive than breaking a fixed rate mortgage. To estimate the cost of breaking your mortgage, our mortgage penalty calculator is a useful tool. 

According to York University Professor Moshe Milevsky’s landmark 2001 study, historically, over 90% of Canadians who have maintained a variable mortgage rate throughout their entire mortgage term have paid less in interest than those who have stuck to a fixed rate.

How to select the term for your mortgage rate

Choosing between a short-term mortgage or a long-term mortgage can also affect your interest rate. A short-term mortgage generally offers a lower rate, and, as it requires more frequent renewal, you can benefit from lower interest rates when you renew, if rates stay low at your renewal. Long-term mortgages, on the other hand, offer stability, as you won’t need to renew it often. However, long-term mortgage holders may not be able to take advantage of lower interest rates if the market fluctuates. 

Open vs. closed mortgages

If you’re wondering whether to get an open or closed mortgage, the answer is, while an open mortgage may make sense in certain circumstances, the overwhelming majority of Canadians opt for a closed mortgage. While open mortgages have extra flexibility that you might need, closed mortgages are by far the more popular choice not only due to their lower rates, but also because most home buyers do not intend to pay off their mortgages in the short term. Moreover, fixed-rate open mortgages do not exist and variable-rate mortgages are very rare. The most common type of open mortgage is the Home Equity Line of Credit (HELOC). Below are some quick facts about the differences between open and closed mortgages, and you can also find more detailed information on our blog about open vs. closed mortgages.

Closed mortgages:

Closed mortgages have lower rates compared to open mortgages. Closed mortgages can come in fixed and variable form, but place restrictions on the amount of principal you can pay down each year. If you pay off the entire principal in a closed mortgage before the set term, you will face a prepayment penalty, which is normally a 3-month interest charge.

Open mortgages:

Open mortgages allow you to pay off your entire mortgage balance at any time throughout the term. The drawback is that you pay a premium for that option in the form of higher rates. You might opt for an open mortgage if you are planning to move in the near future, or if you’re expecting a lump sum of money through an inheritance or bonus that would allow you to pay more of your mortgage off.

How do I qualify for a mortgage in Canada?

While it’s important to think about qualifying for the best rates, you should also give some thought to the basics that you’ll need to qualify and get approved for your mortgage. To qualify for a mortgage, here are some of the most important things that prospective lenders will want to see.  

A good credit score - You should have a credit score of 680 or higher to qualify for the best mortgage rates, but to qualify for a mortgage at all, you’ll need a credit score of at least 560. In addition to looking at your credit score, prospective lenders will also consider any derogatory information from your credit report, such as any missed payments (particularly if they have gone to collections). If you have bad credit, generally defined as a credit score of less than 660, you are unlikely to qualify for the best mortgage rates, and instead you’ll need to use a sub-prime mortgage lender like Equitable Bank or Home Trust. If your credit score is even less than 600, you will most probably need to use a private lender like WealthBridge. Sub-prime mortgage lenders are happy to work with people with a poor credit history, but they will charge higher mortgage rates. It's a good idea to have a detailed understanding of how your credit score affects your ability to obtain a mortgage.

Proof of income - You’ll also need to provide proof of income in the form of pay stubs and/or tax documents like your Notice of Assessment (NOA). Keep in mind that if you recently started a new job, even with proof of income, many lenders will want to see that you’ve held the position for at least a year. 

Ability to pass a mortgage stress test - Finally, to be eligible for the mortgage amount you want, you will need to pass a mortgage stress test. The stress test ensures that you can still afford your mortgage payments at a higher mortgage rate, which is the higher of your contract rate + 2%, or what is called the "qualifying rate" and is set by the Office of the Superintendent of Financial Institutions (OSFI). So, for example, if you were being offered a mortgage rate of 4.45%, the lender might do a stress test to see if you could still afford payments at 6.45% (4.45% + 2%), as that is higher than the qualifying rate of 5.25%. 

Historical Canada mortgage rates

Looking at historical mortgage rates in Canada is a good way to understand which types of mortgage attract higher rates. They also make it easier to understand whether we’re currently in a low or higher rate environment, relatively speaking.

Here are some of the lowest Canada mortgage rates of the year for different types of mortgages over the past five years.

Source: Ratehub Historical Rate Chart

Is it worth working with a mortgage broker?

First, what exactly is a mortgage broker? Independent mortgage brokers are licensed mortgage specialists who have access to multiple lenders and mortgage rates. They essentially negotiate the lowest rate for you, and because they acquire high quantities of mortgage products, mortgage brokers can pass volume discounts directly to you. There are advantages to getting a mortgage directly from a lender as well as getting a mortgage through a broker, but there are differences between going with a bank vs. a mortgage broker. While going directly to your current bank lets you consolidate your financial products, using a broker allows you to shop around quickly and easily, at no cost to you.

Luckily, you don’t need to choose one or the other. You can speak to multiple banks and use a mortgage broker if you want to. Ratehub.ca is a great place to start, as we compare the best mortgage rates in Canada from multiple lenders. Once you’ve compared your options, we can put you in contact with your chosen provider.