Where Are Mortgage Rates Headed?

by Jordan Lavin January 7, 2019 / No Comments

A new year can mean new things for many people. For you, this might be the year you choose to buy a new (or your first) home. This may also be the year that your current mortgage is up for renewal. Since mortgage rates can have a huge impact on how much you can afford to buy (and how much more you might be spending after renewal), you’ll want to know where mortgage rates are headed if any of these items are on your list for 2019.

What are the best mortgage rates today?

Over the last year, mortgage rates have been rising steadily.

Five-year fixed rates reached their lowest point in late 2016. Since then, the economy has generally been doing well and pushing fixed mortgage rates up at a rate of about a half a percentage point per year. If you’re shopping for a new 5-year fixed mortgage today, the best rate in Canada is 3.29%.

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Variable rates have been rising as well. The Bank of Canada (BoC) raised its key interest rate three times in 2018, directly affecting all new and existing variable-rate mortgages. Even with discounting, the best 5-year variable mortgage rates are still up about 0.75% since this time last year. The best 5-year variable mortgage rate is currently prime minus 1.30%, which currently works out to 2.65%.

What’s going to happen to fixed mortgage rates?

There had been some concern that fixed mortgage rates would rise rapidly in late 2018 and into the early months of this year. The signing of the new NAFTA-replacing US-Mexico-Canada Agreement was supposed to end a long period of “wait and see” that was holding back the economic forces that would otherwise have been pushing interest rates up. But a softening economy, falling oil prices, and an ongoing trade dispute between the United States and China have kept that increase from materializing so far.

A rise in fixed mortgage rates is still likely, however. Even if a quick jump doesn’t happen after all, the slow and steady march upward should continue. If the last two years are any indication, 5-year fixed mortgage rates should end 2019 up about 0.50% at roughly 3.79%.

What’s going to happen to variable mortgage rates?

The BoC controls a number called the target for the overnight rate, which directly influences the banks’ prime rate, which in turn influences variable mortgage rates. The BoC has eight opportunities per year to raise the overnight rate and used three of them to do just that in 2018. All indicators were pointing to a fourth rate hike until just a few weeks before the last announcement of the year in December when things stopped looking so certain.

Rising variable mortgage rates remain a probability, however. The BoC has warned Canadians to expect rising interest rates to come. And variable mortgage rates have been rising faster than fixed rates. Even though they’re the better deal overall right now, they could go up suddenly at any time.

The best indicator to watch for here is inflation. When inflation goes up, the BoC will be inclined to raise rates as a countermeasure. Gas prices, which have fallen roughly 30¢ per litre since October in most of the country, will be the harbinger here. Once you see the price of gas start to go back up, there’s a good chance variable mortgage rates will go up soon after. Mortgage rates in Alberta won’t be disproportionately affected though; these policy interest rates affect all Canadians equally.

The BoC’s next opportunity to raise rates is this Wednesday, January 9th.

What’s the outlook for homebuyers?

Even though mortgage rates are up from where they had been, they’re still incredibly low where history is concerned. And low mortgage rates allow people to borrow more money, which translates directly to higher house prices.

This is compounded by a dearth of real estate inventory, especially in Toronto and Vancouver where the real estate market has been unpredictable over the last several years. Since there have been fewer new listings than usual in both cities, there will be upward pressure on demand. Unless there’s a significant rise in mortgage rates in Ontario or BC the first few months of 2019 – which currently appears unlikely – watch for the spring housing market in those cities to start earlier and burn hotter than usual.

This may not be the worst news, however, especially for first-time homebuyers. Especially because it can take months or years for house prices to be influenced by economic changes, homebuyers are unlikely to be stuck with the double-burden of higher house prices and higher mortgage rates.