For more than a year, the Bank of Canada has kept its target for the overnight lending rate at its effective lower bound of 0.25% to provide support for the country’s economic recovery during the COVID-19 pandemic.
Now, while the country heads into its second year of the pandemic, it doesn’t look like the Bank will be changing its tune any time soon.
On March 10, during a regularly scheduled announcement, the Bank said it would hold the overnight rate at 0.25%, and potentially keep it at this level into 2023. In addition, the conventional five-year mortgage rate has also remained unchanged from its 4.79% value since August 2020.
All mortgage applicants must qualify for financing based on an interest rate no less than the benchmark five-year lending rate, even if the mortgage is for less than five years. The Office of Superintendent of Financial Institutions consultations are currently underway to raise that qualifying rate to 5.25% in the uninsured mortgage space.
James Laird, co-founder of Ratehub.ca and President of CanWise Financial mortgage brokerage, walks us through the latest news on Canada’s mortgage market and how it could impact consumers in 2021.
What the latest Bank of Canada rate means
The Bank’s decision to hold the overnight rate at 0.25% was not unexpected in the mortgage industry, Laird says. What’s more significant, he explains, is the central bank’s reaffirmed commitment to keeping rates unchanged for another two years.
“The reason that was notable is because there’s been a fair amount of good news that’s happened in the beginning of the year,” said Laird.
Although there have been some positive events in early 2021, like the ongoing vaccine rollout and gradual economic recovery, Laird says unemployment in certain industries still remains high. Many part-time and hourly workers in the hospitality, tourism and retail sectors who were hit hard by the pandemic are still out of work. Laird explains the Bank will want to see that situation improve significantly before changing rates.
“In that last announcement, they pointed to that and said, ‘You know what? Even if there’s good news about many things, we’re going to keep watching this factor before we consider changing off our stance of keeping rates low until 2023,’” said Laird. “That will be an important factor to watch.”
Even though mortgage rates have been and will likely be at low levels for some time, Laird explains this is not necessarily the No. 1 motivating factor behind the red-hot demand for real estate across Canada. Instead, he attributes this to the lifestyle changes the pandemic has influenced. Many of us have reconsidered our living situation, particularly those who now work from home, Laird says, and this has been motivating people to buy a home that’s better suited for their current needs.
“No one says, ‘I wasn’t going to buy a house, but since rates are low, I’m going to buy a house.’ That’s never happened,” said Laird. “It’s other lifestyle things [that] cause you to want to purchase a new house or change the house that you have. Rates are just a contributing factor.”
While the mortgage market-influencing overnight rate will remain unchanged for the time being, fixed-rate and variable rate mortgages have been slowly diverging throughout the first months of 2021. Variable rates are more directly influenced by the overnight rate, as banks use it as the benchmark to determine their own prime rate, which produces their variable mortgage rate offerings. Because of this, variable rates have remained virtually unchanged. Fixed-rate mortgages on the other hand have been inching upward, and as a result, Laird says demand for variable rate options has increased.
“Now that fixed rates are up a little bit, we are seeing more demand on the variable side because the spread between variable and fixed is greater than what it was before because variable rates haven’t changed at all,” said Laird. “Fixed is still the most popular, but more people today are choosing variable [rates] versus a month ago.”
If you’re a new or current mortgage holder
For prospective homebuyers, the process of choosing a variable or fixed-rate mortgage may feel more overwhelming given the unusual economic conditions. Laird explains the decision to go with a fixed or variable rate should be influenced by the holder’s own individual circumstances and strategies.
“There’s never a time where we’re advising everyone to take fixed or everyone to take variable. It all depends on the situation of the consumers and their household and the type of people that they are,” said Laird.
Consumers who are more risk-averse may want to avoid a variable-rate mortgage and settle for a fixed-rate, Laird says. If you have the financial flexibility to manage a variable rate in the event it rises, and you’re comfortable with some uncertainty, then a variable rate could be a suitable option.
Ultra-low mortgage rates may be an exciting prospect for existing mortgage holders who could be tempted to break their term in order to chase a lower rate and accumulate savings for other projects. Laird notes when it comes to fixed-rate mortgages, however, there’s usually not much savings to be had as the penalty to break the mortgage could be equal to the savings — the lower the current market rates are, the higher the penalties can be to break, he says. Getting a mortgage penalty quote from your provider and then speaking with your mortgage broker to work out the math are the appropriate steps in determining the best course of action.
“If you’re near the end of your term, it can make more sense, especially if you think that by the time your renewal comes up, rates will be higher, then that can make sense,” explains Laird.
What’s on the horizon for mortgage rates in 2021
Looking ahead, Laird says it’s tough to pinpoint when the real estate market will cool down. Since mid-2020, demand for Canadian housing has
been quickly accelerating, which Laird anticipates will continue.
Laird says the outlook for variable rates is they will remain where they are, while fixed-rates should move up moderately throughout 2021. Optimism about vaccine distribution, unemployment levels, and a return to normality will play a role in rate forecasting this year, he explains.
“If you’re optimistic about those things, then you should anticipate fixed rates going up higher. If you’re pessimistic, then you would not be expecting fixed rates to go up much,” said Laird. “We’re all individuals and as we all kind of decide what our rate strategy is. That’s really what we talk to our clients about.”
If you’re looking for up-to-date insight on the mortgage or housing market, enlist the services of an experienced REALTOR® who can connect you to the most relevant sources and mortgage experts.
— Realtor.ca