Mortgage holders across Canada can breathe a sigh of relief: fixed and variable mortgage rates are likely peaking out this week, economists say, and could begin heading back down again by the end of the year.
Many expect the Bank of Canada’s expected rate hike on Wednesday will be the final rate hike of the year, meaning the end of a cycle of rising rates for holders of variable rate mortgages.
“After this next rate hike, we’ll see variable mortgage rates, which are tied to the Bank of Canada’s overnight lending rate rise again to as high as 6.25 per cent,” said Robert Kavcic, chief economist at BMO Capital Markets. But he expects that will likely be the final rate hike for the year.
Fixed-rate mortgage holders too are finally in for a break, according to Kavcic.
These mortgages are tied to the bond market and other factors, but typically also rise and fall in tandem with interest rates. Five-year bond rates are now falling, so Kavcic expects the rates on five-year fixed mortgages will soon follow.
“We’ve seen five-year bond yields drop significantly, and that should flow through to five-year fixed mortgages in time,” he said.
If that’s likely it for mortgage rate hikes, the question now is how long we’ll have to wait before they head back down.
“That’s really the question for the next two years,” Kavcic said. “Once the Bank of Canada eases its tightening cycle, where will rates settle?”
Since March 2022, the Bank of Canada has hiked the overnight lending rate seven times to help cool soaring inflation.
But in 2023, variable rate mortgages are likely to remain at around six per cent and fixed-rate mortgages will be in the 4.5 per cent to five per cent range, economists say.
“We see that inflation panic has peaked, and the Bank is more optimistic it can control inflation,” Benjamin Tal, CIBC Capital Markets deputy chief economist said. There won’t be a free fall in the five-year fixed rate or variable rate, he added, because inflation is still above the two per cent target.
“The Bank likely won’t cut its rate until early 2024,” Tal said. And, it’s unlikely rates will go back to pre-pandemic levels in the three per cent range.
“There are many inflationary pressures now that will force the Bank of Canada to keep the overnight lending rate higher than pre-pandemic,” he added.
David Macdonald, senior economist with the Canadian Centre for Policy Alternatives, said he isn’t so sure whether the Bank of Canada’s rate hike on Wednesday will be the last one of 2023.
While headline inflation has dropped since the June peak, core inflation — the change in prices of goods and services except from the food and energy sectors — has failed to come down in a similar fashion, he said.
However, Kavcic said he thinks it likely is the last hike, so homeowners and buyers can have some confidence that the interest rate run-up has finally peaked, which should lift the “negative sentiment” in the housing market.
“When the Bank of Canada says its tightening cycle is over, that will really help,” he said. “But interest rates at these levels will be tough. It will be hard for many people and it doesn’t help with affordability.”
Macdonald hopes that rates will come down before the end of 2023, especially if there’s a significant decline in inflation, which is a possibility, he said.
In the meantime, homeowners and buyers are in a tough bind.
Currently, higher interest rates are not being offset by lower home prices, Macdonald said, meaning prices need to fall further to alleviate some of the pressures felt by those higher mortgage rates.
For those on a variable rate mortgages, most have fixed monthly payments, but amortization periods lengthen when interest rates increase — when the homeowner hits their trigger rate, monthly payments increase.
“There won’t be relief in rates coming down quickly,” Kavcic said. “At least not in 2023.”
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