Canadians gearing up for a run at the fall housing market and existing homeowners with a mortgage renewal looming might see interest rates heading down in the weeks ahead thanks to recent market volatility, experts tell Global News.
Stock markets around the world largely recovered Tuesday from a global selloff triggered by weak jobs data in the United States. But that volatility in equities also impacted the bond market, a key driver for fixed mortgage rates.
The five-year government of Canada bond yield, which lenders use to gauge their five-year fixed-rate mortgages on offer, briefly dipped below three per cent this week for the first time since last spring.
Penelope Graham, mortgage expert at comparator site Ratehub, says the bond market is typically a “safe haven” for investors in times of volatility in the stock market. Traders pile into bonds during signs of trouble, pushing prices higher and yields down.
With lenders looking to the bond market to set their rates on offer, “that really sets the stage for additional fixed mortgage rate discounts,” she says.
Graham notes that fixed rates have already been heading down in recent weeks amid easing in the bond market tied to expectations for the Bank of Canada’s rate cuts. With the central bank delivering back-to-back interest rate cuts and keeping the door open to more, bond yields have largely been trending down since May on expectations for lower borrowing costs to come.
The lowest rate on an insured, five-year fixed mortgage on Ratehub is 4.29 per cent right now, Graham notes, a low not seen since last spring when the housing market saw a brief burst of activity.
“We could be set to see additional discounting if yields do trend lower,” she says.
Calls for faster rate cuts from Bank of Canada
After the Bank of Canada’s quarter-point cut in July, many forecasters had anticipated that a gradual pace of easing would see the benchmark interest rate end the year around four per cent from today’s 4.5 per cent levels.
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But some market watchers are now expecting that the Bank of Canada could pick up the pace of rate cuts in the months ahead, which can drive bond yields down further and will directly impact variable mortgage rates in the market.
Benjamin Reitzes, director of Canadian rates and macro strategist at BMO, noted that as of Tuesday, markets were pricing in an additional 75 basis points of rate cuts from the Bank of Canada this year and another 75 basis points of declines by mid-2025.
BMO, too, has accelerated its expectations for rate cuts, now calling for the policy rate to decline by 25 basis points at each of the remaining meetings in 2024, ending the year at 3.75 per cent. CIBC mirrors that call.
While the spark for recent market volatility was a downbeat jobs report in the U.S., Reitzes notes that weakness south of the border typically climbs north, as well.
A weaker U.S. economy is advancing calls for the U.S. Federal Reserve to begin cutting interest rates, setting the stage for more easing from the Bank of Canada as well, he argues.
“If you were to get the U.S. softening as well, that would mean even a weaker outlook for Canada. And so markets have really changed their pricing to look for more rate cuts from the Bank of Canada and from the Federal Reserve over the next six months, and really through 2025 as well,” he says.
Canada has its own jobs report due out on Friday, with fresh inflation data set for the following week. Snags in the progress of tackling inflation remains the primary risk that could hold the central bank back from more rate cuts, Reitzes says.
But he expects signs of more slowness in the labour market and wider economy, which will set up a path to lower interest rates in the months ahead.
“We’re already experiencing what the U.S. is just starting to see and so we’re not expecting anything new,” he says. “It’s just going to reinforce the trend, and it’s going to reinforce the fact that the Bank of Canada should feel at ease with pulling rates down from here.”
Differences in mortgage types
Eitan Pinsky, mortgage expert at Pinsky Mortgages in Vancouver, says that when bond yields trend lower, it’s the insured mortgages that see rates fall first. Homeowners can get insured mortgages on purchases worth less than $1 million if they’ve put less than 20 per cent down on the home.
It could be two weeks to two months before other fixed rates start to react to changes in the bond market, he notes.
Victor Tran, mortgage and real estate expert at Ratesdotca, also said in a release that major lenders are likely to wait until bond yields have stayed lower for some time before changing their posted rates.
“Currently, the market is too volatile to have that kind of foresight,” he said.
Tran noted that monoline lenders have adjusted rates by five to 10 basis points already, however.
Both Tran and Pinsky noted that lenders in the market today are offering special rates to compete hard for Canadians’ mortgages. Pinsky tells Global News he’s never seen competition this “stiff” throughout his career in the space.
Whether a borrower is shopping for a new mortgage this fall or renewing into a new term, he says it’s wise to shop around and go back to major lenders to get a lower rate, rather than take what is presented up front, because that’s likely not their best.
The “vast majority” of clients are currently going for three-year fixed-rate mortgages, Pinsky says, based on the assumption that interest rates will be lower in three years’ time when they come up for renewal.
But he’s also recommending some Canadians look towards the variable rate space right now, where a homeowner’s contract rate can fall in line with Bank of Canada interest rate cuts.
While variable rates on offer are currently above most fixed options in the market, Pinsky says some homeowners might benefit from the flexibility of the variable route. Someone with a variable mortgage can lock into a fixed-rate option at any point, allowing them to pay less with each anticipated interest rate cut and then decide months down the line if they’re happier with the new fixed-rate offers in the market.
“I personally just renewed one of my mortgages into a variable rate because I believe that the fixed rates are going to be decreasing. I’m going to be able to take advantage of lower fixed rates in three to four to six months,” he says.
Some Canadians can get caught up trying to get the lowest possible rate on their mortgage but might be wise to consider other aspects like penalties for prepayment and breaking the mortgage, Pinsky notes.
“Not everything is about rate. It’s about features.”
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