FIXED MORTGAGE RATES NOT YET FALLING AND HERE’S WHY
The Bank of Canada delivered a second consecutive 50 bps drop to its policy rate on December 11th. After five straight cuts in 2024, the Bank of Canada’s key rate (aka overnight rate) ends the year at 3.25%.
While Canadians with variable-rate debt such as mortgages and home-equity lines of credit will see an immediate reduction in their rates of interest in line with the Bank of Canada’s 50 bps cut, unfortunately those shopping for fixed-rate mortgages will not see the same reductions.
Fixed-rate mortgages don’t respond directly to the Bank of Canada’s policy rate. The factors that determine variable mortgage rates are different than those that determine fixed mortgage rates.
Variable rate mortgages are set indirectly by The Bank of Canada, the federal organization responsible for Canada’s monetary policy, our actual money, our financial system, and is also a bank to the banks. They provide ‘loans’ to chartered banks and charge an interest rate called the “overnight rate”.
The overnight rate is directly influenced by the state of our economy whether it is a period of inflation, low- inflation or deflation. When our economy is growing more quickly than expected – the overnight rate will increase to slow the chance of inflation. Whenever the economy starts to weaken and people stop spending, the Bank of Canada will do the exact opposite; lower the interest rates to balance things out.
The Bank of Canada does this by adjusting the target for the overnight rate on eight fixed dates each calendar year.
Fixed rate mortgages are primarily prompted by the yield on Canadian government bonds (also known as bond yields) of corresponding maturity. Bond rates represent the benchmark for financial institutions’ cost of funds. The difference between the two rates (mortgage rates and bond yields) represents the yield that financial institutions require to lend the funds out on the mortgage market.
The cost of capital for financial institutions is dictated by bond yields because they reflect what the market considers to be the cost of funds for the lowest level of risk for a given period.
Factors Influencing Bond Yields.
In order to understand mortgage interest rate fluctuations, we should be familiar with the factors that influence Canadian government bond yields. Bonds issued by the Canadian government are among the most liquid and least risky assets, since they are guaranteed by the Canadian government. A significant volume of bonds are traded daily in the investment market. Supply and demand in the bond market determines their price, which in turn, determines their yield. This yield can be seen as the minimum rate of return required by investors before investing their capital for a determined period. It is influenced by many factors, particularly inflationary expectations, exchange rate, and the return on other financial assets.
Mortgage rates in Canada are determined by many factors that are directly related to domestic economic activity and decisions made by Canadian financial authorities. They are also influenced by foreign economic conditions and investors’ view of Canada’s financial and economic health.
Into 2025, we expect homebuyers with both variable and fixed rate mortgages to see further savings. Further Bank of Canada reductions (albeit predictions are that cuts will not be as aggressive as in 2024) are anticipated for variable rate mortgages and although the bond yields continue to be volatile, fixed rates are expected to decline an additional 0.25-0.50% vs todays rates.
Contact your favourite mortgage broker to learn more.
Our Canadian economy is slowly recovering, which is great news. However, this also means the end of the historic low mortgage rates … and you’d be well advised to lock in your mortgage (renewal, refinance, or new purchase) now.
Candace Perko,
Mortgage Broker
