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Mortgage Rate Outlook Panel

Our panel of mortgage experts share their views on Canadian mortgage rate trends each month by answering this question: What is your outlook for Canadian mortgage rates over the next 30-45 days?

January 2016 Overall Summary

There may be uncertain times ahead for mortgage borrowers, as banks and policy makers deviate from economic norms when pricing interest rates. Fixed-rate borrowers have already witnessed a slight pricing increase from some lenders, as new regulations squeeze profits. Meanwhile, economists are split on whether the Bank of Canada has another January rate cut up its sleeve. However, should a cut occur, it remains to be seen if the resulting discounts will ever reach consumers, as lenders pad their profit margins amid ongoing economic downturn.

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New regulations introduced late last year will impact banks' mortgage funding costs and borrowers' capital requirements. As a result, some lenders, such as Royal Bank of Canada, have raised fixed mortgage rates slightly, despite strong demand for bonds, and lingering low yields. As lenders continue to face these increased costs, along with economic headwinds from a low loonie and oil prices, fixed mortgage rate discounts may become slightly less competitive.

Rocky economy times may call for additional measures from the Bank of Canada. Oil's persistent drop, coupled with lacklustre exports and manufacturing sectors, could prompt the central bank to take out yet another round of monetary policy insurance; economists have priced in the likelihood of a 25-basis point rate cut at 50 per cent in next week's January interest rate announcement and Monetary Policy Report reveal.

This Month's Panelists

Dan Eisner - President, True North Mortgage

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Canadian banks are finding it difficult to maintain profitable spreads in the variable rate market and thus we will continue to see discounts off of prime abate.

The Bank of Canada won't be raising rates anytime soon, especially after the recent news from China about their shrinking growth rates.

Will Dunning - Chief Economist, Mortgage Professionals Canada

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Mortgage lenders have raised their typical discounted rates by 1/10th of a point, in reaction to a change in the their requirements to hold "reserves" against their mortgage loans. The need to hold extra reserves raises their costs. As such, this requirement will permanently increase the gap (the "spread") between mortgage rates and yields for 5-year Government of Canada bonds. So, while in the past a typical spread was 1.80 percentage points, going forward that will probably be more like 1.90 points. During the past few days a negative shift in expectations about the international economic outlook has caused bond yields to fall by about a 1/10thof a point, and the spread between bonds and typical discounted mortgages (5-yrear fixed rate) has expanded to a quite wide 2.25 points. Therefore, there is a chance that mortgage rates could be lowered slightly during the next week or two.

The next rate-setting meeting date for the Bank of Canada is January 20. Canadian economic indicators are mixed, showing just tepid growth in employment, lukewarm growth for retail spending (just barely ahead of inflation), and no growth in the manufacturing sector (which has disappointed expectations that it would start to contribute to growth and job creation). Therefore, the odds have increased (to at least 50-50) that the January 20th meeting will see another quarter point drop in the BoC overnight rate. If it doesn't happen then, the following meeting (March 9) would be highly likely to bring a reduction. Thus, during the next two months we are quite likely to see a drop for prime rates and variable mortgage rates

Dr. Ian Lee - Program Director, Carleton University

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While normally, fixed mortgage rates track the 5-year Canada bond rate reasonably well, these are not normal times. Due to recent regulatory changes in Canada concerning mortgage underwriting announced by OSFI, costs to lenders have increased. Moreover, due to the increased volatility and uncertainty, lenders are facing higher borrowing costs to fund mortgage lending. These events point to an increase in the fixed rate. Indeed, RBC announced a small increase in fixed rates the first week of January. It would appear that fixed mortgages under 3% may soon disappear.

The last 3 or 4 weeks have knocked the stuffing (and bruised the egos) of economists, analysts and forecasters. However, it is essential that analysts sharply distinguish between investment conditions in the capital markets (bad and getting worse) with its concerns over buy, sell or hold versus analysis of the global economy and the increasing divergence between emerging markets (e.g. Russia and Brazil are in deep recession) and mature markets with the US doing very well, Europe doing so-so and Canada looking worse by the week. Any macroeconomic assessment must focus on the continued decline – contra most forecasts – of oil in tandem with the extraordinary volatility of the second largest market in the world (China) and the worsening situation in Canada. These negative and worsening trends in concert with the clear decline in business and consumer confidence in Canada, were captured by the gloomy and resigned tone of the most recent speech by Governor Poloz in Ottawa the first week of January. Taken together, it seems increasingly probable that Gov Poloz will announce a further reduction in the Bank of Canada rate this month.