While variable rate mortgage holders eagerly await the first rate cut from the Bank of Canada, fixed rates are heading in the other direction: up.
After peaking in early October, yields on Canadian government bonds – which lead fixed mortgage rates – fell 125 basis points, or 1.25 percentage points, in early January.
Since hitting that low, they have recovered by about 60 basis points, paring gains of about 25 basis points over the past three weeks. As a result, fixed mortgage interest rates are included.
Strong economic data is to blame
Interest rate expert Ron Butler of Butler Mortgage says 2- to 5-year mortgage rates have risen 15 to 30 basis points at various lenders in recent weeks.
Butler says the gains are mainly driven by recent US data, including strong employment, GDP and inflation figures.
As we reported earlier this month, US CPI inflation was up 0.4% month-on-month in March and 3.5% year-on-year. That led some economists to speculate that U.S. interest rate cuts could be postponed until later this year, or possibly even into next year.
On Wednesday, US Federal Reserve Chairman Jerome Powell appeared to confirm those calls when he said a “lack of further progress” on inflation could lead to interest rates remaining higher “as long as necessary”.
In Canada, where GDP growth and employment have held up better than expected, markets are still looking at the Bank of Canada’s first rate cut at the June or July rate meetings, although that could always change.
Where can fixed rates come from?
Interest rate expert and mortgage broker Ryan Sims, who predicted the interest rate rise in a CMT column published earlier this month, thinks that fixed interest rates still have some room to rise.
“I still see mortgage rates rising, although I think another 20 to 30 basis points would be enough,” he told CMT. “The gap between fixed and floating is too wide, and the bond market has priced in a lot of cuts that I don’t think will last much longer than people thought.”
The average deeply discounted five-year fixed rate available for insured mortgages (with a down payment of less than 20%) is currently around 4.79%. “I think we’re seeing a rate of 5.29%,” Sims said.
While it is widely expected that fixed rates will fall again once the Bank of Canada rate cuts are imminent, Sims says there is a wildcard to consider: that fixed rates will continue to rise even as BoC rates fall.
“Canadian fiscal policy is in bad shape, and I think you could see government bonds, and by default mortgage rates, rise – regardless [BoC Governor] Tiff Macklem is reducing nightly rates,” he said. Rate cuts implemented too early could be seen as a “panic measure” by international markets and help interest rates rise, he noted.
“People forget that interest rates are about perceived risk, and beyond [this week’s] The budget and risk in Canada, at least from an investment perspective, has increased,” Sims added. “I could easily see another 20 to 30 basis points in Canadian government bond yields over the next 12 to 18 months on a risk basis alone – regardless of what overnight rates actually do.”