Mortgage Temperature Check is a monthly column by John Shmuel, RATESDOTCA's Director of Content. He dives into what’s going on with mortgage rates and the Canadian housing market. Have a question or feedback? Reach out to John at john.shmuel@rates.ca.
All the mortgage brokers I speak to say the same thing — this has been one of the slowest markets of their careers. Walk through any neighbourhood in the Greater Toronto Area and the For Sale signs are plastered everywhere.
And who can blame Canadians for not wanting to buy in this environment? While housing prices have come down in markets across the country, it’s been offset by higher interest rates. Which means the average payment for a home is now higher than it was before house prices started falling.
Affordability will come back in one of two ways. Either house prices come down further, or interest rates must go down (we could get both).
Interest rates, at least, are going down. Tuesday’s inflation reading is a bright green flashing indicator that inflation — the thing that triggered this spike in rates in the first place — is cooling.
The Bank of Canada will keep cutting as a result, and mortgage rates will follow.
“Today’s CPI print should be enough to quell concerns about sticky inflation pressures in Canada” RBC economist Claire Fan said on Tuesday. “The hurdle for more BoC cuts this year is low.”
Mortgage rates are heading in one direction over the next year: down. It may not be sharply or suddenly, but all the data points to this one fact.
How low do rates have to go to entice buyers?
Well, put simply, rates must go low enough for buyers to be able to afford their payments.
For many in the industry, they see the golden number of 4% as an inflection point — that’s where many predict buyers will begin returning to the market.
“If rates do drop to that level, an influx of buyers will come off the sidelines and sales volume increase in the short-term,” says Victor Tran, licensed mortgage broker and real estate agent.
But he says the big question is if 4% can result in sustained home sales.
“As demand increases, supply will get swallowed up and housing prices will creep up again,” Tran points out. “That will offset the lower rates.”
Mortgage rates at 4% or even lower are not far away. Some brokers I spoke to this week have talked about negotiated deals around 4.2% for insured mortgages. These are special cases and required bargaining. But it’s clear lenders are willing to go lower in this environment.
That’s because the five-year Government of Canada bond yield has fallen below 3% for the first time in more than a year. The best three-year publicly advertised rates right now are sitting at 4.69% for fixed and 5.55% for variable (these are insured rates. Meanwhile, for five-year, we’re seeing 4.49% and 5.55%.
| Province | 3-year fixed | 3-year variable rate | 5-year fixed | 5-year variable rate |
|---|---|---|---|---|
| Alberta | 4.69% | 5.55% | 4.49% | 5.55% |
| British Columbia | 4.69% | 5.55% | 4.49% | 5.55% |
| Ontario | 4.69% | 5.55% | 4.49% | 5.55% |
Lowest advertised rates on RATESDOTCA as of Aug. 20, 2024. These rates are only for illustrative purposes.
Predicting exactly when lenders will start offering 4% or lower is a bit tricky. Lenders don’t always pass on every downward move in bond yields, as other factors, such as credit risk, go into pricing mortgage rates. That’s why the best mortgage rates in 2020 didn’t come when the Bank of Canada cut rates to zero in March of that year — they started appearing toward the end of the year.
What we can be certain of is that the Bank of Canada will cut more times this year. The risk has clearly shifted from inflation to a weakening Canadian economy.
What to watch next
Our eyes are on the autumn homebuying market and the spring 2025 market. While this summer has been exceptionally weak, it’s always been a slow seasonal period for home sales.
September historically sees a pickup. And there are some developments this year that should help the autumn market. An additional rate cut is expected at the bank’s announcement on Sept. 4, which will take the overnight lending rate to 4.25%.
The best variables in this environment are likely to be in the mid-5s, and the best fixed rates should settle around the mid-4s or slightly lower. Those numbers will bring back some buyers, especially combined with all the housing inventory now sitting on the market.
There is one wildcard that no one is talking about yet: deflation. In a deflationary environment, buyers hold off making purchases because they expect prices to be lower in the future.
And that could keep the market quiet this fall if buyers are thinking rates — and maybe even prices — are going to go down even further.
If that happens, we’ll have to wait until the spring market for the next chance at an invigorated housing market. Expect rates to fall even further by then, which makes for a nice recipe for increased sales.
Either way, lower mortgage rates are coming. And that’s good news for all the prospective homebuyers out there.
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