Canadian Mortgage Rates: Prolonged Upward Trend Amidst Banks' Minimal Rate Reductions

Canadian Mortgage Rates: Prolonged Upward Trend Amidst Banks' Minimal Rate Reductions

Mortgage rates in Canada are heading on an unexpected trajectory, and it's not in favor of those hoping for lower rates. The Government of Canada's 5-year bond yield has surged to multi-year highs, with significant implications for mortgage costs. This surge in yields is part of a broader trend, making it increasingly challenging for borrowers to find refuge from rising rates. As the world adopts a "higher for longer" monetary policy, one of Canada's major banks is revising its rate cut projections downward.

The GoC 5-year bond yield has experienced a rapid ascent in recent days, closing at an astonishing 4.338%. In just one day, it climbed more than 7 basis points (bps), and over the past month, it has surged by 43.9 bps. This remarkable increase in such a short time period is nothing short of remarkable.

This surge in yields has propelled the bond to its highest level since 2007, nearing a critical threshold. Consequently, we can expect 5-year fixed-rate mortgages to follow suit and become more expensive in the coming year. Yields are on the rise not only in Canada but also in most advanced economies, putting upward pressure on all fixed-term mortgage rates.

In response to this yield surge, BMO has adjusted its rate cut expectations. Instead of anticipating more rate cuts, they now foresee only two cuts in the next year—a 25 bps cut in Q3 and another in Q4, leaving the overnight rate at 4.5% by the end of the year. This downward revision of 25 bps is attributed to the global yield increases.

Michael Greogory, Deputy Chief Economist at BMO, explained, "This reflects the theme of 'higher for longer' amid continued economic resiliency (but less so now in Canada) and inflation stubbornness." He points to economic strength, elevated inflation, and rapid population growth as factors contributing to these smaller rate cuts. Consequently, it's unlikely that the economy will see a reduction in monetary stimulus until at least 2025, leading to higher interest rates across the board for a longer period than previously anticipated.

So what's my take?  There's more uncertainty than ever before when it comes to mortgage rates, and that uncertainty is going to stick around through 2024.  Bond rates have fluctuated over the past year but have seen a general rising trend, similar to mortgages.  My guidance at this point is to lean on your experts if you're purchasing a home - specifically an experienced mortgage broker who can tailor advice to your specific situation and risk profile.  Talk to me if you would like an introduction!

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