Mortgage Rate Outlook Panel

Some lenders have moved their fixed rates higher over the last couple of weeks primarily in response to higher market yields. Longer term yields have come off of their recent highs easing the pressure on fixed rate mortgage spreads. I believe that market yields will remain close to current levels and are biased to move lower given persistent bad news on the global economic front.

Recent data on the Canadian economy indicate a sluggish pace of growth and the Canadian inflation rate remains at the lower end of the Bank of Canada's target. The outlook for global growth remains tepid at best with risks biased to the downside. For these reasons the Bank of Canada has held its overnight rate for the foreseeable future.

Bond yields have bounced up recently but may be back on their way down. We have seen a few lenders increase their rates, but despite softening bond yields we expect rates to stay where they are.

Banks and Canadians in general do not seem interested in variable rate options with 5-year fixed rates so low.  As a result, we don't foresee any changes to the variable rates in the next while.

Demand is declining in Canada for mortgage money in part due to Flaherty's mortgage rule changes and in part to a perception that the Canadian economy is slowing.  As noted below, EU is declining further while the U.S. is stalled. Moreover, fixed rates are at the lowest period in our history and have little room to fall further.

As anticipated, Department of Finance Governor Mark Carney did not increase interest rates on September 5. Internationally, the latest numbers from the EU are trending more negative, with Germany's unemployment increasing while Greece asks for yet more time to stave off the inevitable, and Spain wants a bailout but with no strings attached. The U.S. economy is stagnant and everything is on hold until election day on Nov. 6.

On the homefront, both Carney and Finance Minister Jim Flaherty warn of worse economic news yet to come. To cap it all off, Quebec has elected a PQ Government that will bring even more uncertainty, and possibly fiscal policies that will increase the deficit in the province, which currently has the worst debt to provincial GDP at 54 per cent. Indeed, there is a risk down the road that Canada will face a financial crisis over Quebec – not a constitutional crisis – if the bond markets turn against Quebec as they did against Spain and Greece. This could cause the Quebec Government to seek a bailout from the Government of Canada and we then see something similar to the Germany-Greece dialectic.

Although there has been some movement in the Canadian bond yields (recently trending downward) the government has hinted at rate hikes vs. a drop. However, with the European debt crisis still a fresh source of uncertainty, a rate hike is unlikely. Due to this, fixed rates are to remain unchanged.

As economists forecasted, the Bank of Canada announced September 5 that they will maintain the overnight lending rate at 1 per cent. Variable mortgage rates will follow suit, holding steady for the foreseeable future.