Mortgage rates have declined over the summer, welcomed news for mortgage holders and those looking to buy a home. The question, says Canadian Mortgage Professional (CMP) is how far will fixed rates decline? “Canada’s five-year government bond yield, which strongly influences fixed mortgage rates, has been on a downward trend throughout most of the past few months, partly due to gathering storm clouds over the US and Canadian economies,” reports CMP. “The Bank of Canada, meanwhile, introduced its first interest rate cuts in over four years, bringing its overnight rate, which leads variable mortgage rates, down by a total of 50 basis points in June and July.” Ryan Sims, a mortgage agent with TMG The Mortgage Group, told CMP brokers should be cautious in advising their clients that a significant further drop in rates is likely. “Rates are coming down, which is good, but I don’t know how much more room there really is to go lower,” he told CMP. “I think too many people expect rates to go back to almost the COVID-19 lows (when the Bank of Canada slashed its overnight rate to .25%). They know they won’t go right back there, but they expect them lower than where they currently are. And I just don’t know how much lower we can truly go.” The bond market, Sims pointed out, is already pricing in things that are likely to happen in nine to 12 months, including a further weakening in the economy. That means interest rates already reflect a probable downturn, reports CMP. “Equally, while the five-year bond yield may continue trending lower, that won’t necessarily see a corresponding drop in fixed rates, Sims recently said,” says CMP. “Borrowers shouldn’t expect an immediate basis-point-for-basis-point dip in their rates in line with bond yield declines.” “Eventually it will match, but it’s going to be a bit of a lag,” said Sims. “My prognostication would be for every basis point you lose in the bond market, you’re probably only going to get about half a basis point, maybe three quarters of a basis point to the mortgage rates themselves.” Even experienced mortgage holders wrestle in their minds whether to go with, or renew with, a fixed or variable rate mortgage and Sims advises borrowers to understand what they’re hoping to accomplish with their mortgage and select an option that allows them to achieve that. “The choice between fixed and variable in the current market is still centred around that question,” he says. “If you want financial security or you’re comfortable paying that fixed rate, then pay the fixed rate. If you’re comfortable taking the risk of a variable, take the risk of a variable.” “In the long run, variable rates are expected to fall further, with the Bank of Canada seemingly set for another flurry of rate cuts in the coming months and moving into 2025,” says CMP. “Lower variable rates down the line seem a safe bet, but the million-dollar question to me always is ‘Will the banks start to loosen or tighten the spread on that variable?’” said Sims. “Today, you can get it at prime minus one. Maybe that goes down to prime minus a half.” “In that case the variable rate went down, but unfortunately the end result for the client wasn’t as advantageous as it should be.”
