September 2023 mortgage market update: 

The last few months have been very volatile in the Canadian mortgage market, and September 2023 is no exception thus far. Bond yields are at levels not seen since 2007, exerting continued upward pressure on fixed mortgage rates, while variable mortgage rates remain high after the Bank of Canada’s two consecutive rate hikes in June and July that brought the target Overnight Lending Rate to 5%. Here’s what today’s mortgage shopper in Canada should know:

Bond market update: Fixed mortgage rates are directly linked to the bond market rather than to the Bank of Canada’s policy rate. In the wake of the latest hotter-than-expected August inflation data (see below for more information), Government of Canada five-year bond yields have soared. They reached 4.15% on August 15, a high not witnessed since 2007. So long as bond yields remain above the 4% mark, they continue to exert heavy upward pressure on fixed mortgage rates. We can expect continued volatility in the bond market for the next several weeks, as a number of important data reports (such as the job numbers report and the September consumer price index report) will be published before the next Bank of Canada rate announcement on October 25.

CPI update: The Bank of Canada keeps a close eye on inflation, as this metric is the key measure that guides its monetary policy. The Bank uses its policy rate (also known as the Overnight Lending Rate or benchmark rate) to control inflation. When inflation is trending excessively high, as has been the case since the end of the pandemic lockdowns in 2021, the Bank responds by hiking the policy rate. By making the cost of borrowing money more expensive, the Bank seeks to tamp down consumer spending and borrowing activity and stifle the growth of inflation. Conversely, when the economy is slumping, the Bank of Canada cuts its benchmark rate to encourage borrowing and spending.

The latest Canadian consumer price index (CPI) stood at 4% in August, exceeding expectations and outpacing July’s excessively high figure of 3.3%. According to Statistics Canada, the increase has been driven in large part by rising gasoline prices coupled with soaring shelter costs as the rental market becomes ever more expensive. Mortgage interest costs, already the single biggest contributor to rising inflation, went up slightly on a monthly basis from 30.6% in July to 30.9% in August. Grocery price growth continues to be uncomfortably high, but has slowed down somewhat to 6.9% in August, down from 8.5% in July.

In light of this CPI report, it is difficult to say whether the Bank of Canada will choose to raise its Overnight Lending Rate at its upcoming October 25 announcement. September’s CPI figures will have come out by then, which should bring some degree of clarity.

Read more: August inflation hits 4%, increasing chance of October rate hike

Real estate update: The Canadian housing market slowed down noticeably in August, as the effects of the Bank of Canada’s June and July rate hikes set in. Some 40,257 properties changed hands over the course of August, marking a year-over-year increase of 5.3%, but down by -4.1% from the previous month. A slight monthly increase in inventory of 0.8% indicates that new supply is returning to fairly normal levels, which is a bit of welcome news for would-be buyers.

However, the national home price continues to be on the rise, though August’s average Canadian home price of $650,140 was up by just 2.2% annually, but down a whopping -20% from the market’s February 2022 pandemic-era peak. The MLS Home Price Index, which measures the value of the most typical home type sold, was up by an anemic 0.4% on both a monthly and annual basis.

Buyer appetite has fallen most significantly in Greater Vancouver, followed by Montreal, Ottawa, Hamilton-Burlington, London and St. Thomas.

Read more: August market returned to “better balance” due to improved listings

5-year fixed mortgage rates are the most popular type and term combination in Canada, so it’s usually the first place people start when researching mortgage rates. Ratehub.ca makes it easy to find the lowest 5-year fixed mortgage rates, as we bring rates from the big banks, lenders and credit unions all to one place at no cost to you.

September 6, 2023 Bank of Canada announcement update

On September 6, 2023, the Bank of Canada held its target for the overnight rate at 5.00%.

• A number of key data points used by the Bank when assessing how to proceed justified a rate hold. These include soft Q2 GDP numbers, a reduction in consumer spending, a softening housing market and increased slack in the labour market. That said, inflation remains obstinately above the Bank’s target of 2%, and the Bank was very clear that it would not hesitate to raise the target for the overnight rate again if necessary.
• In light of the Bank’s commentary concerning the possibility of future rate hikes if inflation remains elevated, Canadians should budget accordingly.
• Fixed-rate mortgages are not directly tied to the Bank of Canada’s target for the overnight rate, but rather to the bond market. Given the Bank’s decision to maintain rates, it is unlikely that we will see a substantial jump in bond yields, which means that fixed rates should remain stable. Anyone looking to purchase a home should get pre-approved to hold today’s rates for up to 120 days as well as to protect themselves in the event of any rate increases during that period.
• Canadians who are looking to get a mortgage in the fall, whether it be fixed or variable, will be pleased with this rate hold. 
• It’s too early to tell whether this rate hold will be sufficient to encourage people to go out and start buying homes, or whether the current rate environment is already too elevated to get buyers off the sidelines.

5-year fixed mortgage rates: Quick facts

• Mortgage rate is fixed over a 5-year term
• 5-year mortgage rates are driven by 5-year government bond yields
  
  

What makes a 5-year fixed-rate mortgage right for me?

Generally, a fixed-rate mortgage is a good choice if you are risk-averse and don’t want to deal with the stress that could come with a variable rate if the prime rate goes up over time and your mortgage payment increases. Before committing to a 5-year mortgage, you need to think about your personal situation today and going forward. If you are likely to move, change jobs, or otherwise embark on any life changes that may affect your ability or desire to remain in the home you are purchasing, you need to take this into account when selecting the mortgage that’s right for you.

Full feature mortgages vs. restricted mortgages

While it’s always desirable to obtain the best mortgage rate, in today’s historically high rate environment, the quest to find the lowest rate seems more important than ever. It also means that one needs to be vigilant about choosing the right mortgage for your needs. The lowest rate that you see advertised may not be what you want, because it could well be for a restricted mortgage. Although the low rates of a restricted mortgage may catch your eye, it’s important to understand the drawbacks. A full feature mortgage will have a higher interest rate, but it will also have a number of features that make it very desirable, including:

• Pre-payment options: Take a look at what pre-payment options your lender is willing to offer you. The more flexible your lender is with pre-payment options, the faster you can potentially pay off your loan, which could save you thousands of dollars in interest fees. The main pre-payment options are monthly pre-payment and lump sum pre-payment. In the case of the former, you’re allowed to increase your monthly payment up to a certain percentage determined by your lender, maxing out at 100%. If you had a lender who was flexible enough to allow you to double your monthly payments, for example, you could in theory pay your mortgage off in half the time if you were able to do so. The latter option, lump sum pre-payment, allows you to pay off up to say, 25% of your mortgage loan, again, depending on your lender.
• Porting your mortgage: If you need to sell your home before the end of your mortgage term, many lenders will allow you to port your mortgage. Porting a mortgage means to take your current mortgage with its existing rates and terms and transfer it to another property, and allows you to avoid breaking your mortgage. You’ll want to talk to your lender about how portable your mortgage is, particularly if you think you may need to move before your term is up. Not all mortgages are portable, and many that are portable have conditions attached that you should be aware of.
• Lump sum pre-payment privileges: You are allowed to make multiple lump sum pre-payments to bring down your mortgage balance in a given calendar year. Most lenders will cap the amount of pre-payments you can make, e.g. you cannot pay more than 20% of your principal in a single year.
• Payment flexibility: If you choose to increase the size of your regular mortgage payments, you are able to do so without incurring any penalties or fees.

These are just some of the most common features you’ll find in a full feature mortgage that make them so convenient for homebuyers. To learn more about the mortgage that’s right for you, it’s always a good idea to speak with a mortgage broker. They can give you personalized, expert advice at no cost to you.

What are some of the pros and cons of a 5-year fixed mortgage?

There are pros and cons to choosing a 5-year fixed mortgage rate, and we’ll walk you through each below. Some of the pros of a 5-year fixed mortgage are: 

• Risk protection: For buyers who are risk-averse; a fixed rate mortgage enables you to “set it and forget it” - your rate, and therefore mortgage payment, is locked in and will not fluctuate with changes in bond yields. This allows you to budget with greater accuracy and offers you stability for the duration of your term. Moreover, in recent years, Canadians enjoyed access to some of the best fixed rates available in decades, although fixed rates started to climb again in October of 2021. Since then, high inflation, global banking instability, an incredibly tight job market and other factors have all pushed bond yields up, and with them, fixed mortgage rates. Today’s fixed rates are now higher than they have been since back in 2009.
• Competitive rates: The 5-year term is historically the most popular option, and the one that lenders often encourage you to opt for. The length of this term is a good “middle of the road” choice for home buyers. Because it’s such a competitive, popular rate term, lenders often get the most aggressive when pricing these terms.

On the flip side, there are some cons to consider as well. 

• Higher rates: In order to guarantee your fixed rate, your lender will charge you a premium. 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.
• Breakage penalties: While the 5-year term can offer you peace of mind, in the event that something such as a move, loss of a job, illness or divorce forces you to break your mortgage, you could be on the hook for a hefty break penalty. With a fixed mortgage rate, your penalty will be the greater of the interest rate differential (IRD) or three months’ interest. Oftentimes, the IRD penalty can be large, and thus a fixed rate mortgage can be expensive to break. If you have a variable rate mortgage, on the other hand, the penalty will always be three months’ interest, and it can therefore be less costly to break your mortgage. For a more detailed explanation of IRD and how it is calculated, you can refer to our Mortgage Refinance Calculator page. You can also use our Mortgage Penalty Calculator to estimate how much you might have to pay in the event that you have to break your mortgage. 
  

Historical 5-year fixed mortgage rates

Looking over historical mortgage rates is the best way to understand which mortgage terms attract lower rates. They also make it easier to understand whether rates are currently higher or lower than they have been in the past.

Here are the lowest (high-ratio, insured) 5-year fixed rates of the year in Canada for the last several years, compared to several other types of mortgage rates.

Source: Ratehub Historical Rate Chart

The popularity of 5-year fixed mortgage rates

A 5-year mortgage term is the most popular duration. It sits right in the middle of available mortgage term lengths, between one and 10 years, and, thus, its popularity reflects a risk-neutral average. It also tends to be heavily promoted by major lenders. A further breakdown of mortgage terms shows that about 80% of mortgages have terms of five years or less.

Fixed rates are by far the most common - in 2023, from January to April, 95% of mortgage rate inquiries made to Ratehub.ca were for fixed rates. 

What drives changes in 5-year fixed mortgage rates?

By and large, 5-year fixed mortgage rates follow the pattern of 5-year Canada Bond Yields, plus a spread. Bond yields are driven by economic factors such as unemployment, export and inflation.

When Canada Bond Yields rise, sourcing capital to fund mortgages becomes more costly for mortgage lenders and their profit is reduced unless they raise mortgage rates. The reverse is true when market conditions are good.

In terms of the spread between the mortgage rates and the bond yields, mortgage lenders set this based on their desired market share, competition, marketing strategy and general credit market conditions.

References and Notes

1. Trends in the Canadian Mortgage Market: Before and During COVID-19, Statistics Canada, 2021
2. Annual State of the Residential Housing Market in Canada, Mortgage Professionals Canada, 2021
3. Housing Market Report: 2022 Year-End Consumer Survey and Outlook, Mortgage Professionals Canada, 2023

For more information, check out these helpful pages 

• Best Mortgage Rates in Canada
• 5-Year Variable Mortgage Rates
• Variable or Fixed Mortgage Rates
• Amortization
• Mortgage Term vs. Amortization
• Is a 5-Year Fixed-Rate Mortgage Term Right For You?
• Porting and Assuming Your Mortgage