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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?

November 2018 Overall Summary

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Fixed rates are generally dependent on bond yield performance. We have seen improvement in five-year bond yields by over one per cent in the past year and seems likely bond yields will continue to increase. Mortgage interest rates have also increased, but by a smaller amount, and the market continues to be affected by the stricter mortgage stress test posed by OSFI earlier this year.

Economic conditions nationwide and internationally continue to improve, especially since the implementation of the new United States-Mexico-Canada Agreement (USMCA). But with all that being said, it seems like we won't see a huge change in fixed rates until next year.

It seems like the Bank of Canada (BoC) is slowly but surely shifting its outlook on the economy.

Not only did BoC recently hike its rate to 1.75 per cent, but it also expressed a positive change in tone in its most recent Monetary Policy Report, mentioning that "the policy interest rate will need to rise to a neutral stance to achieve the inflation target." This is in comparison to the modest tone the Bank had at its last interest rate announcement, saying it will "continue to take a "gradual approach, guided by incoming data."

With the new USMCA trade deal in place, and with the economy operating at capacity, most of the panel believes that multiple increases are coming in the new year and that variable rates will increase as such. Higher rates will soon translate to higher borrowing costs for Canadians with floating rates loans and variable mortgages. In the meantime, it doesn't seem like the Bank has plans to increase rates before the end of the year.

This Month's Panelists

Will Dunning - Chief Economist, Mortgage Professionals Canada

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Interest rates for fixed-rate mortgages are influenced by changes in government bond yields. Since mid-2017, bond yields have trended upwards. A year and a half ago, the yield for five-year Government of Canada bonds was just under 1.0 per cent. Recently, they have been in the area of 2.4 per cent.

Mortgage interest rates have also increased, but by a smaller amount. I estimate a typical "special offer" rate from major lenders is now likely around 3.5 per cent, versus 2.6 per cent a year and a half ago. So while bond yields are up by 1.4 points, the typical mortgage rate has increased by 0.9 points. Housing activity has slowed, and this has forced lenders to compete more aggressively.

Looking forward, economic conditions are still very positive in Canada, the U.S., and indeed, much of the world. However, there is a bit more pressure on inflation. And more importantly, the U.S. government is developing large borrowing needs due to enormous tax cuts implemented by the Trump Administration.

In consequence, it seems likely that bond yields will continue to rise. By mid-2019, typical special offer rates for five-year fixed-rate mortgages may be in the range of 3.75 to 4.0 per cent.

The Bank of Canada has now raised its "overnight rate" five times in the last year and a half, by a quarter point each time. In a statement that accompanied the latest increase on October 24, the BoC said that "the policy interest rate will need to rise to a neutral stance to achieve the inflation target". This is a change in tone as previous statements had a more tentative and cautious tone.

Economists and financial markets are interpreting this as evidence that the BoC rate could increase its key interest rate by one to 1.25 point in the coming year. I expect that there will be one or two more increases (on January 9 and/or March 6). But it will definitely take some time before we see any notable effects on the economy.

The increases in short-term and long-term rates will increasingly weigh on the economy with time. In addition, the mortgage "stress tests" have weakened the housing market and this will gradually affect the broader economy. But I expect that by the middle of next year, the BoC position will shift again and it will pause on any further rate increases.

On the positive side, the price of oil is recovering, but so far, the level is not going to stimulate a strong recovery in the producing provinces. Meanwhile, higher gasoline prices will weigh down the other provinces, as consumers won't be able to spend on other goods and services. It is possible that the BoC will increase its rate one more time this fall, and variable rates will correspond.

Dan Eisner - President, True North Mortgage

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Like my son in front of his computer playing Fortnite, mortgage rates aren't moving anytime soon. The Bank of Canada has done an admiral job of communicating the likelihood of future prime rate moves to the market. There will be more moves, but bond yields and mortgage rates have already priced in that possibility.

Inflation is on the high-end of acceptability, so we will likely see at least one prime rate move next year. That being said, there likely won't be any discounts off of prime offered to clients any time soon. Notably, RBC recently launched radio campaigns that pointedly called out TD for having two prime rates (though they didn't mention TD by name). I wonder if clients will respond.

Dr. Ian Lee - Program Director, Carleton University

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Bond yields have been quite stable throughout 2018 with small fluctuations of less than half a point. The mortgage tightening rules took some additional demand from the mortgage markets, and there is no other evidence that suggests changes to fixed mortgage rates for the rest of this year.

On Oct. 24, 2018, the Bank of Canada raised the central bank rate to 1.75 per cent. The bank justified its decision in its most recent Monetary Policy Report, pointing out that the economy is operating near capacity, while risks have been reduced principally since the initiation of USMCA. Indeed, the cautious language concerning future rate increases was dropped and replaced with a warning that interest rates will need to increase to the neutral stance between 2.5 per cent and 3.5 per cent. So, it appears we can expect a few rate increases in the new year.

Shawn Stillman - Mortgage Broker, Mortgage Outlet Inc.

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Over the last 30 days, most lenders have raised rates at least once. And given the Bank of Canada's most recent outlook, it is widely expected that there will be more increases over the next few months as fixed rates keep up with rising variable rates. Over the next 12 months, I would not be surprised to see fixed rates between 0.5 per cent to 0.75 per cent. However, I don't see any more major increases until the end of 2018. There are still lenders offering as low as 3.19 per cent for a five-year fixed-insured mortgages, but most lenders are currently between 3.44 per cent and 3.79 per cent for insurable and uninsured mortgages.

Predicted by most, the Bank of Canada raised the benchmark interest rate to 1.75 per cent at its October meeting. But notably, in a statement, the Bank said, "Governing Council agrees that the policy interest rate will need to rise to a neutral stance to achieve the inflation target." That being said, if the Bank is looking for a rate between 2.5 per cent and 3.5 per cent, we can expect a minimum of three more increases over the next 12 months, and as many as seven before the next recession (whenever that may be). The major banks have remained steady with their variable rates at prime (0.7 per cent), and monolines are still offering rates as low as 1.24 per cent on insured and insurable mortgages. Many consumers are taking the variable option with such deep discounts. I still see the discount offered on variable mortgages to remain flat over the next few months, even though prime is expected to increase to 0.75 per cent in 2019, bringing variable rates to the four per cent range.