For potential homebuyers in Canada, staying informed about mortgage rate trends is crucial. Mortgage rates can significantly impact the affordability of your home purchase and the overall cost of your mortgage. In this guide, we’ll provide insights into the projected mortgage rate trends in Canada and how they might affect you in the coming year.

Understanding Mortgage Rates

Before diving into the forecast, let’s briefly review how mortgage rates work. Mortgage rates are the interest rates charged by lenders on home loans. They are influenced by various factors, including:

  1. Economic Conditions: A strong economy generally leads to higher mortgage rates, while economic uncertainty can result in lower rates.
  2. Central Bank Policies: The Bank of Canada plays a significant role in determining interest rates. Changes in the central bank’s policies can influence variable mortgage rates.
  3. Global Economic Events: Global events, such as trade agreements, geopolitical tensions, and economic crises, can impact interest rates.
  4. Housing Market: Local housing market conditions, including supply and demand, can also affect mortgage rates.

Projected Mortgage Rate Trends in Canada

As you may have heard, The Bank of Canada opted to maintain its policy rate at 5% as of September. The recent rate hikes over the spring and summer have slowed the housing and mortgage markets as potential buyers were unsurprisingly spooked by the rise in mortgage rates. More recently, fixed-rate loans have become more expensive because of the rise in longer-term interest rates. As a result, housing affordability became a bigger hurdle and led to a slight decrease in home prices by 6% in major markets over the summer.

With The Bank of Canada currently maintaining the 5% policy rate, many hope this will be the peak in overnight rate changes. If so, homeowners and potential buyers will be granted some breathing room. We will find out more with their upcoming announcement on October 25th.

As we turn the corner into Fall and start looking ahead to the coming year, analysts are forecasting stronger housing markets. The expectation is that The Bank of Canada will gradually cut interest rates by mid-year, allowing potential buyers to better navigate their affordability.

Factors Affecting Mortgage Rate Trends in Canada:

  1. Bank of Canada Policies: The Bank of Canada’s primary interest rate, known as the overnight rate, directly influences variable mortgage rates. Any changes in the central bank’s policies lead to immediate adjustments in these rates.
  2. Economic Recovery: As the economy recovered from the pandemic, there was upward pressure on interest rates. Since the economy has continued to strengthen, interest rates have gradually increased.
  3. Global Economic Conditions: Global events, such as changes in trade dynamics and inflation rates, have strongly influenced mortgage rates in Canada.

How Mortgage Rate Trends Can Affect Homebuyers in Canada

Now, let’s explore how these projected mortgage rate trends might affect potential homebuyers in Canada:

  1. Affordability: Rising interest rates will increase the monthly payments on a home loan. This directly reduces the affordability of homes, particularly for first-time buyers with limited budgets.
  2. Budget Planning: Higher rates require careful budget planning. Buyers need to consider the impact of potential rate increases on their monthly expenses.
  3. Variable vs. Fixed Rates: Homebuyers should decide between fixed-rate and variable-rate mortgages. Fixed-rate mortgages offer rate stability, while variable-rate mortgages can provide lower rates but are susceptible to fluctuations.
  4. Mortgage Term: The choice of mortgage term (e.g., 5-year fixed, 2-year fixed, etc.) can also impact how rate changes affect your finances. Longer-term fixed-rate mortgages provide rate stability and may have slightly lower initial rates, but currently that means locking in to a rate that may decrease within the next few years.
  5. Market Timing: Timing can be essential. If you believe that rates may rise or remain high in the coming year, locking in a fixed-rate mortgage now might be a prudent choice. The Bank of Canada is quite upfront with their intentions to maintain interest rates over the next year, with their forecast being to begin rate reductions starting at the end of 2024.

Tips for Homebuyers in Canada

To navigate Canada’s mortgage market effectively in the face of potential rate changes, consider these tips:

  1. Consult a Mortgage Professional: Work with a mortgage broker or lender who can provide guidance based on your financial situation and market conditions. It is important to get pre-approved to guarantee your interest rate for 90-120 days while you shop the market.
  2. Budget Conservatively: When calculating what you can afford, use a slightly higher interest rate to ensure you’re prepared for rate increases. This is already done for you when qualifying, as lenders are required to perform “stress tests” which qualify the borrowers at 2% higher interest rates than their current contract rate, in order to ensure they can afford their mortgage should rates rise in the future.
  3. Review Your Options: Explore different mortgage types, terms, and lenders to find the best fit for your needs. A mortgage broker will have the most options and will choose the lowest rate for a term that suits your needs.
  4. Stay Informed: Keep an eye on economic news and the Bank of Canada’s announcements to stay informed about potential rate changes. You can find these updates on our instagram page, with the next announcement coming on October 25!

As the housing supply shortage continues, new listings are likely to rise and provide much-needed new inventory. As we move into 2024 and start to see interest rates decrease, motivated sellers will move off the sidelines and housing demand is expected to be resilient.

In conclusion, as interest rates in Canada continue to rise, it’s essential for potential homebuyers to be aware of projected interest rate trends. Rising rates can affect affordability and budgeting, making it crucial to plan carefully and consider your options. By staying informed and seeking expert advice, you can make informed decisions and navigate Canada’s real estate market effectively in the coming year. Remember that the actual mortgage rate trends may vary, so it’s wise to consult with a mortgage professional for the most up-to-date information and personalized advice.