We’re back on the rate roller coaster; let’s brush up on the basics and what comes next.

Now that May Long Weekend is behind us and the sun is shining, the last thing we want to be thinking about is mortgage rates - but, unfortunately, the market has other plans.

With fixed rates ticking back up again this week and the Bank of Canada poised to do - well, pretty much anything at this point - let’s brush up on where rates come from, how to choose the best for you and how you can hedge yourself against whatever this summer has in store.

The world’s most boring roller coaster

Ever since that faithful spring when a new germ descended on our lives and changed everything, the roller coaster of interest rates and the real estate market have had Canadian homeowners and prospective buyers holding on for dear life. Just a couple of short years ago, we were living in the luxury of sub-2% 5-year fixed rates and a benchmark rate at a tiny 0.25%. Since then, we’ve enjoyed eight consecutive rate increases from our friends at the Bank of Canada, a 20% drop in home prices, and a slew of buyers who couldn’t take advantage thanks to qualifying rates of over 7%.

So here we are, heading into the summer market with another bout of uncertainty before us. Two weeks ago, we were basking in the glow of slowing inflation, decreasing fixed rates and hope that the Bank of Canada could send us some relief as soon as the end of the year. But after April’s numbers proved that inflation might be more stubborn than anticipated, we’re back on that upward curve. So what does this all mean for your summer purchase or refinancing plans? Let’s start with a quick refresher on which mystical forces create this rate environment, anyway.

Hey, Bank of Canada, what gives?

If you recall, we wrote a deep dive into where Canadian mortgage rates come from last summer. If you’re keen to learn more, we recommend hopping over and checking that post out before diving into this one. In that post, we dug into the origins of our rate landscape and why we see the rates we do as consumers. Let’s check in on what the BoC has been up to in this one.

Starting in March 2022, the BoC started a cycle of 8 consecutive rate hikes in an effort to battle record-high inflation. At that time, inflation was as high as 8% in Canada, and, as we have discussed previously, the overnight rate is one of the only tools in their pocket to force it back down to the 2% target. With each hike, we saw more homeowners with variable rates getting walloped with spiked mortgage payments, and the narrative shifted to doom and gloom. But this March, when inflation had proven to be heading in the right direction, and the BoC announced a pause, we breathed a collective sigh of relief.

But now that inflation has seemingly stalled out above 4% and the US federal reserve is discussing further rate hikes itself, there is a looming possibility that the Bank of Canada may follow suit and slap us with another hike this summer. We have been getting asked a lot about our predictions for the June 8th rate announcement, and it’s anyone’s guess now. April’s inflation numbers proved that the market is still exceptionally strong and may require an extra push (which the BoC has been clear that it won’t shy away from), but softening month-to-month GDP coupled with public pressure to avoid recessionary fallout could make them extend the pause yet again.

Are fixed rates broken?

A variety of factors influence fixed mortgage rates, but the one we watch most closely is the government bond market of the same length (5-year bonds for 5-year rates, 3-year bonds for 3-year rates etc). When the yield of a given bond increases, we can typically expect that the fixed rate of the same length is sure to follow, and vice versa. Because government bonds are a very safe way to invest, investors will typically sell off their bonds in favour of purchasing higher-risk, higher potential yield investments when the market is strong. This drop in demand decreases the yield as the value of the bond drops. When the market outlook is less than stellar, on the other hand, investors will flock back and purchase bonds to shelter their cash and weather any potential storm. When this happens - you guessed it - increased demand drives the price up, and the yield shoots right up with it.

Things were looking great earlier this spring! Inflation was heading quickly in the right direction, prompting investors to sell their bonds and drawing fixed rates down. More buyers were coming off the sidelines and warming up the market and pushing prices up for the first time in about a year. But those pesky inflation numbers caused investors to get on-guard, head back to their trusty bonds and start pricing in more potential rate hikes and, as a result, a potentially harder landing than we’d expected.

So are the lower rates we were seeing last week gone for good now? Much like with the overnight rate, there is no way to know for sure. Keeping a keen eye on the BoC’s June 8th announcement, the US Federal Reserve’s next meeting on June 13-14 and May inflation numbers (released June 27th) will tell us more!

So, what’s a homeowner to do?

So if all of the above tells us that our only option is to wait and see, what is the best thing you can do as a current homeowner or prospective buyer this summer? First, get a rate hold locked in sooner than later. Whether you are considering a new purchase this summer or have a refinance in mind ahead of an upcoming renewal, the best thing you can do for yourself right now is to get the process started. Once pre-approved, we are able to lock in today’s posted rate for you for up to 120 days. This means that if rates continue to trend upward, you’ll be able to move forward with peace of mind! And if rates come back down? No stress! We can simply re-price your file and get you the lower rate when it comes time to purchase. There is truly no downside to completing a rate hold, but a bevy of downsides to missing the opportunity.

Second, consider a shorter fixed-rate term. We are completing a lot of refinances for homeowners this spring - some to access equity while prices are up and rates are down to consolidate high-interest debts or invest in renovations and others to get ahead of upcoming renewals. And while the 5-year fixed rate mortgage has historically been the most common by a landslide, interest in 1-4 year terms has nearly doubled this spring. Why? Because a shorter term allows you the reliability of a consistent payment while also allowing you to take advantage of potential rate decreases sooner without incurring early prepayment penalties. Shorter-term fixed rates do tend to be a bit higher than their longer counterparts, but the potential benefit of being let out of your contract earlier can outweigh that by a landslide.

Finally, start the conversation. If you are considering a purchase, have a renewal on the horizon or are feeling bogged down under consumer debt, it is never too early to start a conversation with a mortgage professional, regardless of the rate environment. But while we are on this roller coaster, feeling supported in your financial decisions is more important than ever. There are tools at our disposal to help ease your mind and your monthly financial burden, but we can’t help until we connect!

Head to the link below to schedule a chat, or reach out any time with questions about your mortgage, purchase, or what is happening in those markets!