Ask the Expert is a monthly column where Steve Garganis, lead mortgage planner at Mortgage Architects and founder of CanadaMortgageNews.ca dives into what’s going on with mortgage rates and the Canadian housing market. Have a question for Steve on home buying and your mortgage? Reach out to us at media@rates.ca.
In the summer of 2016, ahead of the U.S. election, I was sitting at a business dinner. In attendance was one guest who was from the U.S., who had a distinct southern drawl which drew attention from us Canadians.
At the time, presidential hopeful Donald Trump was being mocked and ridiculed by the media as joke. Nobody thought he would be voted in. Then this southern gentleman made this statement: I think Trump will win. We all laughed, but he said the people were tired of the status quo. They didn’t like where the country was going. They were not happy.
And that’s really what it came down to for him: When the masses are not happy in a democratic country, eventually there will be change.
The change happened quickly, and not just for Americans: In January 2017, after Trump took office, he put Canada and Mexico on notice that he wanted to replace NAFTA. For over year, Canada was threatened with being left out of a trade agreement, with concerns hitting a peak on September 1, 2018, when Trump said he would exclude Canada from a new trade agreement if they didn’t sign on to his list of demands.
Not long after, a deal was negotiated. The new United States Mexico Canada Agreement (USMCA) came into effect July 1, 2020.
His second presidency carries some echoes of the first. This time, the threat — now confirmed — is a 25% tariff on all imported goods from Canada.
How long these tariffs will last is anyone’s guess. I suspect this is more of a negotiating tool, straight out of his book, The Art of The Deal. History has shown tariffs are used as negotiations. However, whatever happens next will result in economic shockwaves for both for Americans and for Canadians.
We need to monitor the 10-year US treasury yield
The new reality of a second Trump presidency has made ripples in the economy, particularly when it comes to our fixed rates.
Over last three months we’ve seen the 10-year US Treasury yield spike to 4.8% as of January 14, up from around 4.3% on Election Day in early November.
Canada tends to follow trends in the U.S. The Canada five-year bond yield also spiked on January 14 (to 3.28%) from 3% in early November, before a descent back down (likely in anticipation of interest rate cuts).
The beats of this cycle are somewhat familiar. On November 7, 2016, just after Trump was elected the first time, the five-year government bond yield was nearing 0.9% and quickly increased to 1.2% by December 12.
Why is it important to watch the bond market? Because fixed mortgage rates are tied to five-year government bond yields.
Back during Trump 1.0, fixed mortgage rates saw an increase from 2.84% (on the day of his election) to 3.74% on September 19, 2018, with some slight fluctuations in between. Generally, there was an almost continuous rise throughout the first two years of his presidency, leading up to the pandemic.
Currently, fixed mortgage rates are hovering between 4.34% for insured mortgages and 4.74% for uninsured mortgages. The dynamics are similar – but this time around, Trump has more power, controlling the House and Congress as well as the Executive Branch. Of course, U.S. midterm elections are in two years, so we may only have to endure any radical changes for two years at most (and even then, I don’t think radical changes are necessarily likely).
However, if history repeats itself, it stands to reason that payments could once again increase by 10% to 13% or more, with rates increasing into the 5% range.
Related: BoC cuts policy rate by 25 basis points amid trade tensions
Interest rates are the single biggest influencer for the housing market
There’s another important event happening in Canada. In early January, Justin Trudeau officially announced his resignation as Prime Minister of Canada. A federal election is expected to be called a month or after the Liberal party chooses their new leader.
The next prime minister – whoever they end up being – will have policies and opinions that will affect our financial markets. Trump’s second turn at the presidency and Canada’s lack of current leader is sure to see more volatile financial markets.
Amid this economic uncertainty, my advice to consumers is this: Play it safe but not too safe. Don’t make any unnecessary purchases that are leveraged with a loan or debt if you feel unsure about your job or income.
On the other hand, if you are planning to make a big purchase, consider how the Trump tariff could impact that cost. If you expect prices to increase, then buy it now.
For homeowners that are refinancing or have their mortgages coming up for renewal in the next four to six months, I strongly recommend you speak with your mortgage broker. Get some advice. Understand your options on what you can do now. Interest rates have fallen from their 2023 highs by about 1% to 1.5%. Fixed mortgage rates were expected to come down another 0.5% later this year but that’s no longer a given.
Variable rates are expected to fall by around 1% by the summer. After that, it will depend on how the economy is doing. You need to have a plan in place for you, for your own situation. Don’t go it alone. Seek professional advice.
If Trump 2.0 is anything like Trump 1.0, we can expect for the first two years of the Trump presidency to see higher bond yields, which means higher fixed mortgage rates. As much as Canada needs lower mortgage rates, it would appear we may not see rates in the 3% range as was expected just six months ago.
If these tariffs are enforced, we are in for a rough ride. Even a 10% tariff would see chaos. Layoffs would occur almost immediately. We could see more mortgage and loan defaults.
Although I believe the tariffs will be short-lived, they’ll still have real-world impacts. In fact, they already are.
