Mortgage rates are below five percent in Canada for the first time in months - that is, if you are specifically looking for a five-year, fixed term on an insured mortgage with less than a 20 percent down payment. (Paul Chiasson/The Canadian Press)
As Canadian lenders anticipate potential interest rate reductions by central banks like the Bank of Canada in 2024, borrowers could receive a belated Christmas gift in the form of lower rates for specific mortgage types. Rates below five percent on certain fixed mortgages are being offered, marking the lowest rates for Canadian homebuyers since late spring.
Victor Tran from ratesdotca, a website comparing financial product costs for Canadians, notes that the last time fixed five-year mortgage rates were around 4.89 or 4.99 percent was in mid-May 2023. Tran, along with mortgage industry experts and economists, attributes the drop in mortgage costs to lower returns from government bonds.
Fixed mortgage rates are closely linked to government bond yields, and Tran highlights that these yields peaked in October but have since declined. The reduced rates, below five percent, currently apply to fixed five-year insured mortgage terms, typically associated with mortgages requiring a down payment of less than 20 percent.
Canadians seeking this specific mortgage type may experience cost savings if they are due for mortgage renewal in the coming months. Tran expresses satisfaction at witnessing some mortgage rates decrease as 2023 concludes.
However, the decrease in government bond yields does not directly benefit those who prefer variable mortgage rates, at least not immediately. James Laird from Ratehub explains that bond yields respond to future developments, whereas variable rate mortgages and home equity lines of credit must wait for the Bank of Canada to lower the overnight interest rate. This reduction causes the prime rate to drop, subsequently lowering variable rates and home equity lines of credit.
Laird notes that Ratehub has been monitoring housing affordability across Canadian cities. While affordability has improved in some regions due to falling house prices, it is not solely a result of lower rates. Even with a reduction in just one specific fixed mortgage rate, Laird suggests that Canadians should find it encouraging.
Lower rates could stimulate increased housing demand, with mortgage brokers like Jacob Sneg from Vancouver observing that many Canadians are waiting for lower mortgage rates before entering the housing market. However, Sneg cautions that delaying a purchase based on interest rates might result in increased competition as more buyers enter the market, potentially driving up purchase prices.
The Bank of Canada had previously raised interest rates to combat inflation, resulting in higher borrowing costs and a subsequent slowdown in business investment and consumer spending. This trend occurred as Canadians allocated more of their budgets toward increased mortgage costs. Researchers at the Bank of Canada reported that around 45 percent of mortgages taken out before the central bank initiated rate hikes experienced payment increases by the end of November. The expectation of higher payments for the remaining mortgage holders renewing by the end of 2026 may have a chilling effect on the economy, with forecasts indicating weak economic growth in 2024 before a potential recovery later in the year.
