Canadian Mortgage Rate Forecast 2024

What trends are we witnessing in fixed rate and variable rate mortgages?

Interest rates in Canada have been rising steadily since 2022 when domestic and global inflation, and a tight job market, created the perfect storm for the Bank of Canada to take action.

This year marks the two-year anniversary of rate hikes, which have been held steady at 5.0% as of March 6, 2024. In its statement about the future, the Bank of Canada noted that it is still concerned about risks for inflation and is looking for sustained easing in things like core inflation, growth in wages and pricing.

This has tremendous impact on what direction both variable and fixed-rate mortgages take. When the Bank of Canada establishes its overnight or policy interest rate, other financial institutions or banks use it to set their rates.

Variable rates, for example, make up about one-third of mortgages in Canada. Because it is adjustable, the rate you pay on your mortgage can move up or down throughout the term. Banks will issue variable rates at prime plus or minus a discount (or premium). As prime rates increase, so does your mortgage. Because rates have increased steadily over two years, people with variable rate mortgages have seen their very low rates increase. As this happens you start paying more interest and less for the principal. The opposite can be true as rates come down.

It may come as no surprise that internal data from RATESDOTCA shows that variable rate mortgages have decreased in popularity since the Bank of Canada began raising interest rates in 2022.

In March 2022, our data showed a 31% jump in requests for fixed rates versus the month before which was a decline of 37%. As rates have increased over the past two years so have those requests. In May of 2022 we saw another 68% increase in requests.

By December 2022 and January 2023, fixed rate requests grew by 70% and 114% respectively. Many believed rates would start to come down and so we started seeing internally that requests also came down for fixed rates. From July 2023 until February 2024, requests have been in the negative column except for a one-month exception in January.

Fixed rates, of course, remain fixed. So, if you locked in a fixed-rate mortgage prior to the rate increases, they have stayed the same throughout the past two years. It’s a bit of a cushion until the term ends. Homebuyers looking at new mortgages within the past two years will have noticed significant increases in mortgage rates, as will people intending to renew. This has cooled the housing market both for buyers and sellers.

In Canada, many believe the Bank of Canada will start decreasing rates 25 basis points, four times (perhaps over the next scheduled decisions), for a full point cut to 4.0%. It seems bond markets have priced that in as 5-year fixed rates have dropped 80 basis points or 0.8% from their highs in October. And while falling inflation is a hopeful sign for a housing recovery in 2024, prices ended last year 13% below their all-time highs.

The 5-year fixed rate has historically been the most popular term of choice for borrowers. However, people do not want to lock their mortgage at today’s high rates for too long and eventually miss lower rates two/three/four years from now. Many borrowers believe we won’t be seeing the current rates for much longer and hope the rates will be lower in the coming years. The trend we see now is with a hope to sign for a shorter-term fixed rate for now, ride it out, and then renew into a lower rate when the term ends or matures. Fixed mortgage rate is by far the more popular choice among home purchasers, especially first-time homebuyers at this time, mainly because of stability and fixed payments that do not fluctuate (unlike variable rate).

According to RBC the composite MLS Home Price Index for Canada was also down 0.8% month over month in December. That follows declines ranging between -0.5% and -1.0% in the previous three months.

Ontario

Canada’s most populous province saw home sales fall 4.0% in the last quarter of 2023. The culprit again was high mortgage rates.

However, markets saw a light at the end of the 2023 tunnel. Sales grew more than 16% from November to December and new listings were also up in Q4 by 3.7%.

As the population continues to grow and the economy seems headed for a soft landing (and not a recession), demand for housing will grow even if rates remain relatively high. The potential for cuts in 2024 could help generate further growth, however. RBC says transactions could grow by 7.7% this year.

British Columbia

Like Ontario, BC saw its seasonally adjusted home sales fall by nearly 15%. Sales also ended the year on a high note with a 7% increase in December and new listings were down 7.5% in Q4 compared to Q3 levels.

Also, like Ontario, BC saw its population grow by 3.3% adding to the housing shortage being experienced in Canada. Mortgage delinquencies stayed low at 0.13%. But it is expected that the market will see prices start to stabilize when the spring market heats up. RBC also says that residential transactions are likely to rebound slightly by 6.4% in 2024.

Alberta

Alberta is unique in Canada. It is the only province to have new listings rise in the fourth quarter (by 3.4%), while the sales-to-new listings ratio ended strong at nearly 70%. The province also saw house prices rise in Q4 by a tepid 0.3% compared to Q3.

And like other major provinces, Alberta saw its population grow by 200,000 people in 2023 – a 4.3% growth rate, which is the highest in the country.

Seasonally adjusted home sales decreased by 4.8% compared to Q3 but December ended on a high note with a 5.7% increase. RBC’s forecast shows that residential transactions will grow by a whopping 13.5%, third in the nation behind PEI and Nova Scotia. Home prices are also expected to rise by 2.2% in 2024, according to the bank.

How does the rate of inflation affect future Bank of Canada interest rate changes?

The current Consumer Price Index (CPI) inflation rate has come down considerably from its peak of 8.1% in 2022. The rate now stands at 2.9% as of January 2024. The Bank of Canada’s target rate of 2.0% has not yet been reached and will not likely be reached, at least for the first half of this year.

That is really the main reason the Bank of Canada has left its key lending rate at 5.0% and is likely to do so for some time. Monetary policy affects and trickles down to the housing market as banks set their lending rates based on the Bank of Canada’s lending rate.

Housing and real estate are interest-sensitive sectors, and as rates remain high, buyers and sellers tend to remain on the sidelines. That does two things: it shrinks supplies and demand dries up. In fact, annual home sales declined 11% compared to 2022, according to the Canadian Real Estate Association.

But even if monetary policy can help fight inflation, higher rates also cut into affordability. The Bank of Canada says some of the effects causing housing prices to climb should have come down by now. But demand has outstripped supply for many years, in part, due to the rise in immigration. So, while the Bank of Canada can deal with inflation and affect the cost of housing in the short run, it cannot address long-term structural problems on the supply side, such as supply chain cost issues and higher population growth.

Mortgage rate determinants in Canada

It is hard to get the same mortgage rate your friend might have gotten while shopping around for rates in Canada. Here are some of major factors which impact your mortgage rates:

1. The economy – When economic indicators such as GDP are strong, and/or the economy begins heating up, interest rates tend to rise. When there are economic downturns, rates generally come down to stimulate spending.
2. Inflation – In a class by itself, inflation has a very important role to play in determining interest rates. As is the case right now, the Bank of Canada has spent the last two years fighting inflationary pressure by raising interest rates. The hope is that this will slow the economy and bring pricing to a more stable level.
3. The bond market – Mortgage rates are affected by the government bond market. Financial institutions will use the 5-year government bond as a benchmark to set their mortgage rates. When yields increase lenders often raise rates to maintain profitability, and when bond yields fall, they tend to lower rates.
4. Your individual credit history – Mortgage lenders look at individual circumstances when setting mortgage rates. A person with a higher credit score, and an acceptable debt-to-income ratio, is considered a lower risk and can likely secure a lower mortgage rate than someone who is not in those categories.
5. Down payment – The greater the down payment, the lower the risk you are considered. Like the logic behind using one’s credit score, lenders look favourably on borrowers who can demonstrate their ability and commitment to paying down their mortgage. A large down payment shows that commitment in the eyes of the financial institution.
6. Individual loan type – Term and length of your mortgage can affect the rate you receive. Generally, rates are typically lower for longer terms, simply because lenders want the business for longer.
7. Competition – Banks and lenders are in business to make money. That’s where competition comes in as each lender is vying for your business by undercutting mortgage rates. Talking to different institutions and comparison shopping can yield very different rate options.
8. Type of property – Rates are typically higher for investment/rental properties vs. a principal residence. The “rate premium” is 0.05% to 0.10%.
9. Amortization – If your amortization is greater than 25 years, lenders will charge a premium of at least 0.10% higher.
10. Closing Date – The mortgage rate can be slightly lower if the closing date is sooner (for instance, 30-day closing vs. 120-day closing). This is tied to the cost of hedging rates.
11. Insured vs. Insurable vs. Uninsured – The lowest rates in the market are Insured mortgages. Rates are higher for insurable and uninsured mortgage rates. In order to understand this better let us define the three rates.

• Insured mortgages are loans that have mortgage insurance provided by CMHC, Sagen, or the Canada Guaranty. It is applicable when a borrower has a down-payment of less than 20% of the purchase price, where in the maximum purchase price is $999,999.99 with amortization of 25 years. Mortgage insurance protects the lender in case the borrower defaults on the loan. The cost of mortgage insurance is passed on to the borrower in the form of premiums which are added to the mortgage payments. Insured mortgages pose lower risk to lenders as the insurance provides a financial guarantee against default, hence lower mortgage rates.
• Insurable mortgages are loans that meet the criteria for mortgage insurance but may not necessarily have mortgage insurance. Borrowers with a down payment of at least 20% but less than 35% are eligible for mortgage insurance. The purchase price is less than $1,000,000 in this case and maximum amortization of 25 years. The lender pays the insurance premiums to protect their risk and the premium is not paid by the borrower. As a result, the cost of the premiums are passed to the borrower in the form of a higher mortgage rate. Even though these mortgages are not insured, they are considered lower risk compared to uninsured mortgages because they meet the standards required for mortgage insurance
• Uninsured mortgages are loans where the borrower provides a down payment of at least 20% of the home's purchase price and thus are not required to have mortgage insurance. The purchase price of the house can be any amount but the downpayment has to be a minimum of 20% and amortization is greater than 25 years. These mortgages carry higher risk for lenders because there is no insurance protection against borrower default, hence higher mortgage rates.