What’s Forecasted for 2020 – 2021 Mortgages?
Where are we today?
- Bank of Canada (BoC) rate, that we often refer to as the “prime rate”, hikes have been paused since October 2018.
- The BoC has left the prime rate unchanged even though the USA and Europe have cut rates to respond to weaker economic activity.
- Most economists forecasted that the BoC would remain unchanged until after the federal election in Canada.
- The prime rate set by the BoC increases when the economy is doing well; but if there is a recession, then lower rates are used to stimulate the economy. Since forecasters are expecting rates to begin dropping it implies they are expecting an economic slowdown or recession.
- Canadian fixed mortgage rates did rise in October, due to investors selling off assets, Government of Canada (GoC) bonds, for example. The selling of these bonds causes their prices to fall and their yields, which our fixed mortgage rates are based on, to rise.
What’s forecasted ahead?
- The consensus is that now that the federal election is over rates will begin to drop in the short-term.
- Rate decreases will also be in response to an economic slowdown.
- Several key indicators point to a 2020 USA recession which would inevitably impact Canada.
- Canada has had an inverted yield curve (when 1-year bonds yield higher interest rates than 10-year bonds) for several months now. All past recessions have been preceded by an inverted yield curve.
- No matter how well-researched the economist’s prediction are, mortgage rate forecasting is only an educated guess.
I have a mortgage renewal coming up, should I be worried?
Borrowers generally do not have to undergo the “stress test” or re-qualify when they renew with their existing lender. This allows the existing lender to offer a much higher rate as they know the borrower may not be in the position to leave. It is so very important to shop around at time of renewal, even if you are unsure if you’d re-qualify.
What’s a person to do?
- Earlier this year, there was a consensus that interest rates would eventually rise but that is likely no longer the case.
- Predictions are that fixed rates will probably be lower or similar to today. Any potential increases should be modest at 10-25 bps.
- You can lock in a rate up to120 days before closing on a home sale or the renewal of your mortgage. This is insurance in case rates increase.
- Variable rates may be a better bet (if you have the risk tolerance for fluctuations!). Based on the latest forecasts, variable rates are more likely to fall than rise in the next two years.
- The scary part of this forecast is that dropping rates would be an appropriate bond-market response to an upcoming recession.
Candace Perko
Mortgage Broker
Countryside Financial
www.countrysidefinancial.ca
