During the great recession in 2008, the economy and financial system as a whole required stimulus and bailouts to keep running. This stimulus eventually got our economy back on track; however, through the years that followed, we saw very stagnant GDP growth and low-interest rates.
During the covid era, we witnessed a similar economic bailout but a far more significant stimulus, with over 40% of Canadian dollars created in the past 2 years. This process is referred to as quantitative easing and was meant to offset the shutdown of the economy and compounding supply chain issues.
There is ongoing pressure for interest rates to remain low. When debt is layered on top of already massive amounts of debt, rapidly increasing interest rates will shock the economy. Here is what you need to know about interest rates for mortgages in the current market.
MARKET CONSENSUS IN CANADA
There are reasons for optimism. While higher interest rates create market headwinds, there are positive demographics for mortgage lending and housing. Household income has increased significantly along with home equity throughout the past 5 years. Employment has also remained strong, and with the lack of housing stock, many Canadians still need homes.
Eventually, we will become accustomed to higher interest rates which will allow the market to reset as the Bank of Canada concludes this round of rate tightening. Inflation will likely reduce significantly as the narrative shifts from a mild recession towards a harder-felt recession.
THE EFFECTS OF THE CHANGING ECONOMY AND MORTGAGE RATES
Based on the assumption that the Bank of Canada is almost finished raising rates, most borrowers are choosing to remain with their adjustable mortgage. This thought process is based on the speculation of declining variable and fixed rates in the future, which could provide a better entry point to convert to a fixed-rate mortgage.
As the Banked of Canada moves its policy rates up, borrower inquiries spike. In recent months, the rate of borrower conversion from an adjustable rate to a fixed-rate mortgage has increased from a normal level of 3% to an annualized rate of 4%. The Bank of Canada is determined to battle inflation as low inflation is the foundation to lower interest rates.
If we stay on this current course, it is likely that within a year or two, the Bank of Canada will have to lower interest rates in order to stimulate the economy. While unpopular, the 2016 introduction of the mortgage stress test was a good idea. Interest rates at the time were historically low, so the policy was appropriate. With interest rates hovering around 5%, the question needs to be asked if the policy should evolve to become more dynamic.
REDUCING YOUR RISK AGAINST INCREASING MORTGAGE RATES
During this time of higher rates, a strategic approach is required to put yourself in a position to take advantage of the lower rates once they begin to fall.
One strategy is opting for a short-term 2-3 year fixed rate that will mature/ renew when rates are expected to be lower. With a fixed rate, locking into a 5-year term at a higher rate represents a risk of paying too much over your term.
The 2-3 year short-term fixed is a safer option, allowing time for the Bank of Canada to adjust rates down to help stimulate the economy. The other approach could be getting a variable rate that may increase higher in the coming months but also leaves open opportunities for falling rates within the 5-year term.
It’s more essential than ever to work with an expert mortgage broker. Borrowers are asking more questions and need better insight to help them navigate this market uncertainty. Mortgage Brokers deliver advice-based help to borrowers. In doing so, we can ensure they get the mortgage they can best afford and one that serves their immediate and long-term needs. Book with me today so we can find the best strategy for you in this current market.
