But then, out of nowhere, came the results of last month’s inflation report. It was too hot, and by some measures, it suggested inflation was re-accelerating. That’s what the market and the BoC didn’t want to hear. So, the market moved the goalposts on when rates cuts would begin – again.
Bond traders now expect the first BoC cut next spring. (Just weeks ago, it was December; weeks before that, it was this summer).
Regardless, we can forget about cuts any time soon. That’s because inflation-wary investors are betting on at least one more hike by September, according to data from Refinitiv.
If it’s not clear already, counting on the market to tell you exactly when rates will drop can be hazardous to one’s mental health.
However, the one thing we can all count on is the fact that monetary policy works.
Sure, there’s every chance that rates could pop higher again – before falling back to their long-term average. But, at a near-record low of 5 per cent, unemployment is entirely too low for borrowing costs to ease meaningfully.
That said, a run-up in rates this summer would simply push the first rate cut further out. It wouldn’t eliminate it.
Recent research from RBC Capital Markets found that U.S. five-year bond yields are almost always significantly lower three to 12 months after the last Federal Reserve rate hike. And most economists and investors think the Fed’s final hike of this cycle is coming before the end of this summer, assuming we haven’t seen it already.
A quick look at Canadian bond history shows the same – which is unsurprising given the correlation between U.S and Canadian interest rates. Bond yields – which lead fixed mortgage rates – are routinely lower within 12 months of the last rate increase.
That’s not some incredible revelation. It’s just how rate cycles work. Inflation rises above the BoC’s target, the bank makes life tough on borrowers with higher rates, consumer spending falls, inflation drifts lower toward its 2-per-cent target, and the bond market anticipates it all.
The only unknown in that oversimplification is “when.”
But here are two more truths that impatient borrowers can rely on. For one, the Bank of Canada is just as anxious to see inflation fall. It doesn’t want to keep rates high for one month longer than necessary.
That’s why markets expect another dose of rate medicine from our central bank, with core inflation temporarily stuck in the 4-per-cent range. But a BoC hike is kind of like that cough syrup tag line: “It tastes awful. And it works.”
Now, don’t get me wrong – higher payments are horrible news if you’ve got an adjustable-rate mortgage or a coming renewal and can’t afford to pay more. I get it. But if there’s any solace, it’s that the more the Bank of Canada hikes, the closer we get to that first cut.
Unfortunately, for the borrowers out there who are hurting, this process will take months. As a result, some folks will need to dip into emergency savings or credit to make it to the other side, and a small fraction will have to sell their homes.
If that fraction includes you, and you’ve absolutely no better option, sell into the market’s current strength before the labour market weakens. No one can say what’ll happen in the housing market when unemployment starts climbing.
For the rest of Canada’s mortgagors out there, if you can tough it out, keep the faith. Barring another unlikely and unforeseen inflation shock, history suggests that 2024 will be a relief year for depleted borrowers.
The latest pop in rates could (slightly) cool the market
In the past few weeks, the lowest nationally-available fixed mortgage rates have shot up by 20 to 35 basis points. If the Bank of Canada scares the market into thinking it’ll get more aggressive with rate hikes, yields – and fixed rates – could climb a bit further. (A basis point is 1/100th of a percentage point.)
The moment of truth comes next Wednesday at 10 a.m. ET. That’s when the central bank releases its next policy statement. There’s a one-in-three chance it’ll hike again, according to rates implied by the bond market.
For now, the lowest fixed-rate offers are still below 5 per cent. That’s not insignificant from a market psychology standpoint. Some borrowers simply don’t want to pay a mortgage rate above that threshold or can’t pass the government’s mortgage stress test with rates that high.
Therefore, even this recent little mortgage rate spurt may be enough to slow the home price rebound we’ve seen since January.
Meanwhile, for all you value shoppers out there, don’t forget about regional lenders and brokers. They have some of the sexiest deals going. Here are a handful of examples for default-insured borrowers who still prefer five-year fixed rates:
- 4.34 per cent at Affinity Credit Union in Manitoba
- 4.34 per cent at Conexus Credit Union in Saskatchewan
- 4.39 per cent at ATB Financial in Alberta
- 4.49 per cent at Meridian Credit Union in Ontario
- 4.49 per cent at Vancity Credit Union in British Columbia
A few of these lenders also offer up to $4,000 cash back, so ask for a rebate where applicable. Just note that borrowers who break their mortgage early must typically repay part or all of any lender rebates.
Rates are as of June 1, 2023, from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20 per cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.