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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?

August 2017 Overall Summary

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Since fixed rates are heavily influenced by Canadian bond yields, and bond yields have substantially increased over the last few weeks (as three-to-five year bonds now sit around 1.44 per cent), there is some room for fixed rates to increase as well.

Economic indicators are also showing improvement, as job growth seemingly increases and consumer spending trends upwards. And recent changes to mortgage financing rules have reduced the amount of eligible borrowers, leaving fewer credit-worthy borrowers with much more negotiating power in a mortgage market that's seeing a decrease in sales. This might be reason for an uptick in rates eventually.

Shortly after the Bank of Canada announced that it was raising its key interest rates by a quarter point (to 0.75 per cent) last month, all major banks announced that they would be increasing their lending rates by the same amount. And though there is speculation that the BoC will raise the overnight rate again by a quarter point at its October meeting, the panel is in agreeance that variable rates might remain unchanged for a while. In the meantime, the BoC will continue to monitor the impact of the July increase on the economy. In addition, an increase will likely be influenced by the performance of the Canadian dollar (as it strengthens, it may affect our exports) and if the Federal Reserve decides to increase its rate soon or not.

This Month's Panelists

Will Dunning - Chief Economist, Mortgage Professionals Canada

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Mortgage interest rates have increased, but not by as much as bond yields, so there is some room for fixed rate mortgage costs to increase, by as much as a quarter point from current levels.

Canadian bond yields have increased substantially over the past two months. The yield for five-year Government of Canada bonds was just over 0.9 per cent in early June, but is now in the area of 1.56 per cent. It's also interesting to compare current bond yields to the average seen in 2015 and 2016 – 0.79 per cent.  From that perspective, yields have increased by about three-quarters of a point.

This rise can be looked at as reason for rates to hold at their current level for a while. However, the market does what the market does, and "over-shooting" is always a possibility.

Furthermore, economic indicators in Canada have certainly improved, with employment increasingly strongly. Consumer spending has also accelerated recently, which is a solid indication that confidence in the economy has improved.  So once again, some increase in interest rates is justifiable.

Looking farther ahead, inflation remains low in Canada and in other "mature" economies. This should prevent any significant and sustained rise in bond yields, for some time. 

The Bank of Canada raised its overnight rate by a quarter point in July, and lenders followed by raising their prime rates and rates for variable rate mortgages by the same amount.  It is now widely expected that the BoC will raise the overnight rate again in the fall, possibly at the October meeting.  One complicating factor is that the Canadian dollar has strengthened (by about five cents) since May. This tends to dampen the Canadian economy a bit, because a strong dollar makes it more difficult for us to sell goods and services to other countries. Depending on what happens with the dollar, the BoC might hold off for a while on the next overnight rate increase.

Dan Eisner - President, True North Mortgage

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Bond yields have been trading at their highest point since late 2014.  And although we have seen five-year fixed rates move up lately, more rate increases may be coming. This is leading to more worrying in the long-term regulatory environment. Some new regulations are coming into force this winter which could make is more difficult to qualify for the mortgage you want.

Canadian banks are happy with variable rate spreads at this time. 

Dr. Ian Lee - Program Director, Carleton University

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The yield on three-to-five-year Government of Canada bonds has stabilized around 1.4 per cent, and inflation continues to "underperform" in comparison to expectations.  Moreover, it appears that demand is finally cooling down as home sales drop in large key markets. Changes to mortgage financing rules have not only reduced the amount of marginal borrowers, but also the borrowers that would not be considered marginal in ordinary times.  The remaining eligible borrowers are much more credit worthy, and as such, they have increased negotiating power in a mortgage market with a plentiful supply of funds. This will temper forces to push rates up eventually. 

The latest job numbers from Statistics Canada demonstrate continued robust growth in the nation, though job creation seemed to have slowed. On the other hand, US job numbers are also looking good with the unemployment rate lingering at 4.3 per cent.

After the Bank of Canada raised its overnight rate, the Prime Minister's Office – staffed with political partisans and not professional economists – let it be known to the media they were not pleased with the BoC's decision.  While this can be viewed as deeply inappropriate, it revealed how political the interest rate setting can become. It is likely the BoC will not increase its rate in September, but rather, monitor the impact of the July increase on the economy before deciding on another increase at its scheduled October 25 announcement.  Moreover, that increase will be influenced by the Fed's decision – if the Federal Reserve increases its rate, it is more likely the BoC will increase its rate as well.