Fixed Rates are Rising - Here's why:
Courtesy of Denise Pisani
As we keep a watchful eye on the Bank of Canada, anticipation grows around potential rate cuts. However, despite the expectations for variable-rate mortgage reductions, fixed-rate mortgages are experiencing a different trend—increasing rates.
Following a sharp decline in Government of Canada bond yields by 125 basis points from early October to January, which typically influence fixed mortgage rates, there has been a rebound. Approximately 60 basis points have been regained, with 25 of those occurring in the last three weeks alone. This rise in yields has inevitably led to an uptick in fixed mortgage rates, with increases between 15 and 30 basis points reported across various lenders.
The shift is largely attributed to robust economic data from the U.S., including significant figures in employment, GDP, and inflation, suggesting a potential delay in expected rate cuts by the U.S. Federal Reserve. Similarly, in Canada, despite strong economic performance, market analysts project the first rate cut might not happen until mid-2023.
Experts suggest that fixed mortgage rates could climb further, possibly reaching up to an additional 30 basis points. Despite the anticipation of rate cuts by the Bank of Canada, the fiscal policy could still lead to higher bond yields and, subsequently, fixed mortgage rates. As the economic landscape continues to evolve, the intersection of fiscal policy and market reactions remains a critical point of focus for both homeowners and investors.
HIGH INTEREST RATES ARE HURTING MANY
Courtesy of Denise Pisani
In Canada's financial landscape, the grip of high-interest rates and a sluggish economy has tightened, reflected in a near halt in credit growth and escalating delinquency rates.
Nonetheless, amidst these challenges, CIBC Deputy Chief Economist Ben Tal discerns hopeful signs indicating a shift towards a spending freeze rather than a catastrophic credit risk event.
The deceleration in credit growth, notably in mortgages, underscores a blend of constrained credit accessibility and cautious consumer behaviour. This is mirrored in the escalating delinquency rates across various credit types, with mortgage renewals looming as an additional challenge for borrowers.
However, amid these worrisome trends, rays of optimism shine through.
Despite a rise in insolvencies, the fact that they stem from historically low levels offers some reassurance. Moreover, the majority of these insolvencies involve debt restructuring, mitigating losses for lenders. There's also evidence of improved communication between lenders and borrowers, with early signs of financial distress being addressed more promptly compared to previous economic downturns.
While challenges persist, there are reasons to believe that the financial landscape can weather the storm. Proactive measures coupled with manageable unemployment rates suggest that forthcoming credit losses may be contained within manageable bounds. Although uncertainties loom large, with prudent monitoring and strategic intervention, the financial ecosystem may gradually pivot toward stability.
Navigating through these uncertain times demands vigilance and adaptability from both borrowers and lenders. By acknowledging the challenges at hand and capitalizing on the silver linings within reach, Canada's credit landscape can chart a course toward resilience and sustainability in the face of adversity.
LET's SEE? Some 2024 Forecasters are signalling:
Here's what the experts are predicting:
January - No rate change
March - No rate change
April - 25-basis-point drop
June - 50 basis-point drop
July - 50 basis-point drop
September - 25-basis-point drop
October - 25-basis-point drop
December- 25-basis-point drop
These forecasts take into account a range of factors, encompassing the economic environment, international interconnections, and the historical trajectory of the Bank of Canada. Although the journey on the rate roller-coaster has been exhilarating, you can be confident that we are not on a course back to the ultra-low rates witnessed in 2020 and 2021.
It's essential to bear in mind that overnight rates constitute just one aspect of the larger financial picture. The five-year Canadian bond yield, moving to its own tune, commenced at 3.42% and concluded at 3.27% by mid-December, anticipating reduced volatility in the year 2024.
Feel free to reach out [🔔] if you have any questions or if you'd like to discuss how these market dynamics may specifically impact your finances and mortgage goals.
The Mortgage Centre- Mortgage In The City | 188 Lakeshore Rd W Unit 6, Mississauga, L5H 1G6 Canada
denise@mortgageinthecity.ca
Mortgage in the City
Mortgage basics
Amortization. Fixed rate. Variable rate. High-ratio. Principal. If you’re mystified by mortgage-speak, you’re not alone. Here’s a crash course in mortgage basics to help you make smart decisions about one of the biggest investments you’ll ever make.
Choose a term that works for you.
A term is a period of time (from 6 months to 10+ years) during which you pay your mortgage at a specified interest rate. To figure out what term is right for you, decide how comfortable you are with the volatility of the market and how important a stable mortgage payment is to your budget.
Long term:
Right now, interest rates are low. If you’re afraid they’ll go up and you want to lock in at a low rate, or you want to know exactly how much you’ll be paying every month, go for a longer term like 5, 7 or 10 years.
Short term:
If interest rates look like they’re falling, this may be a better bet. If you’re comfortable with payments that may fluctuate somewhat, your best bet is a shorter-term mortgage (i.e. a 6-month variable rate mortgage) that lets you take advantage of low rates, but also has the flexibility of allowing you to lock in and convert to a longer-term mortgage whenever you want.
Decide on an amortization period.
The amortization is the number of years (15, 20, 25) it would take to pay back the loan based on a fixed payment amount. The longer the amortization, the more interest you’ll pay. You can shorten your amortization by increasing your payments, paying lump sums towards the principal, or renewing your loan at a lower rate.
Decide on a fixed or variable rate.
A fixed-rate mortgage means you pay a set amount every month for the term of your loan. Whether posted interest rates rise or fall, your payments won’t change.
With a variable-rate mortgage, your interest rate fluctuates with your lender’s prime lending rate. It offers more flexibility, but also more risk. Typically, you pay a set amount every month, but when rates fall, more cash goes to principal, which reduces the interest you’ll have to pay in the long term. If rates go up, however, your set payment may not be enough to cover interest and principal, so you could end up having to pay more.
Choose a closed vs. open mortgage.
In an open mortgage, you can repay your loan any time without penalty. So if you sell another property or come into some extra money, you can pay down your principal whenever you want. Interest rates for open mortgages tend to be higher than for closed, and terms are typically shorter.
A closed mortgage is less flexible. If you decide to pay off a big chunk of your principal, you could incur a penalty. However, even closed mortgages have pretty generous prepayment options (usually up to 20% of the principal per year).
Decide how often you’ll make payments.
You can pay monthly, bi-weekly or weekly. Here’s the difference: with monthly payments, you make 12 a year. With bi-weekly payments, it’s 26. That’s the equivalent of 13 payments a year instead of 12. You probably won’t notice much of a difference in your cash flow, but you’ll pay off your mortgage faster, and save yourself thousands in interest.
Will you get a high-ratio or conventional mortgage?
That depends on the size of your down payment. A conventional mortgage is a loan that covers up to 75% of the purchase price, and doesn’t need to be insured against default. A high-ratio mortgage is anything over 75%, and must be insured by the Canada Mortgage and Housing Corporation (CMHC) or GE Capital. You can add your insurance premium (a percentage of your loan amount) to your mortgage or pay it on closing.
Get pre-approved.
Find out how much you’re eligible to borrow before you start looking. You’ll know exactly how much you can afford, and you’ll be guaranteed the interest rate that’s available at the time of your pre-approval for 60-120 days. If rates go up, you won’t have to worry about paying more, and if they go down, you get the lower rate. It’s win-win, free and there’s never an obligation to go with that lender.
Shop smart.
Now that you’re armed with some mortgage knowledge, you’ll be able to choose a loan that best meets your needs. If you need more info, most lenders have helpful information on their websites, or you can always ask your REALTOR® for help understanding the ins and outs of mortgages.
Trademarks owned or controlled by The Canadian Real Estate Association. Used under licence.
