As Canada’s economy evolves, mortgage rates have been impacted by various shifts in bond performance, policy decisions, and market conditions, not just here but also in the US. Notably, fixed and variable mortgage rates have started to diverge—a trend that might continue, given current economic indicators. Understanding this divergence is crucial for homeowners and prospective buyers aiming to make valuable decisions about their mortgage strategy.

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Key Takeaways

• Variable rates may drop as the Bank of Canada cuts rates.
• Fixed rates could stay due to rising bond yields pressured by a more robust US dollar and economy.
• A personal mortgage strategy is crucial as rates diverge.

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Bond Performance and Mortgage Rates

In Q3 of 2024, Canadian government bonds, especially short-term ones, performed well, delivering positive returns. In contrast, longer-term bonds struggled under rising yields. So far this year, Canadian bonds have outperformed most G7 nations, thanks partly to currency advantages. However, high-yield Canadian corporate bonds have outpaced investment-grade options, driven by shifting economic conditions and growing gaps between Canadian and US bond spreads.

In this context, mortgage rates have been under pressure. Fixed-rate mortgages are primarily influenced by government bond yields, which have seen fluctuating performance. Rising yields often push up fixed mortgage rates as borrowing in the bond market becomes more expensive. Conversely, variable rates, which track the Bank of Canada’s overnight rate, adjust flexibly with each policy rate change.

The US Election and Economic Repercussions

The recent US presidential election added volatility, particularly in the bond market. Following the surprise result, bond yields initially spiked but quickly receded. Despite a short-lived surge, investors remain cautious, and Canadian bond yields remain subject to US Treasury pressures. Canadian fixed mortgage rates are pegged to bond yield performance and could stay steady or increase, while variable rates may decline alongside anticipated Bank of Canada rate cuts.

The Strengthening Dollar

When the US dollar strengthens, it often reflects and amplifies challenges in the global economy. Investors seeking safe assets during economic uncertainty tend to favour the dollar and US Treasuries, creating a cycle where economic slowdowns fuel dollar gains, and a stronger dollar, in turn, worsens global conditions. Emerging markets feel the most impact—IMF research shows that a 10% rise in the dollar can shrink their output by nearly 2%, while advanced economies experience a more modest 0.6% reduction. The economic drag can last over two years for many emerging markets, with recovery being notably slow.

The dollar’s influence spreads through trade and finance. Since a significant portion of global trade is conducted in dollars, a stronger greenback raises import costs, curbing demand and slowing trade volumes. This is especially critical for regions like Asia and Latin America, where the dollar’s value can outweigh local currency fluctuations. On the financial front, dollar-denominated debts become costlier, increasing repayment burdens for countries and companies without dollar-based revenues. Rising interest rates in the US further reduce global investment appeal, pushing capital out of emerging markets and forcing them to raise rates despite economic slowdowns. Recent spikes in global bond yields highlight the interconnected pressures central banks face as they try to support growth amidst tightening monetary conditions.

The Fed’s Policy Rate Cut and Canadian Implications

The US Federal Reserve recently cut its policy rate by 0.25%, aiming to balance inflation and economic uncertainty. While the Bank of Canada (BoC) continues monetary loosening in Canada, variable-rate borrowers may benefit as further cuts are anticipated. These cuts could ease the cost of borrowing and monthly mortgage payments for variable-rate holders. Still, fixed rates will likely remain elevated due to bond yield pressures and other macroeconomic factors.

Canadian Employment Data and Inflation Concerns

Canada’s labour market added fewer jobs than expected in October, but wage growth has risen, sustaining inflationary pressure. Rising labour costs and stagnant productivity put the BoC in a cautious position to cut rates aggressively. This dynamic affects mortgage rate projections: fixed-rate mortgages tied to long-term bonds may not significantly decline. At the same time, variable-rate borrowers could experience relief if the BoC resumes rate cuts to counteract the employment slowdown.

BoC Cautions on Mortgage Market Interventions

BoC Deputy Governor Carolyn Rogers recently highlighted the “mortgage renewal wall” Canada faces over the next two years, as numerous borrowers will renew at higher rates. While Canadians historically manage mortgages well, the BoC cautions against government interventions that artificially lower short-term borrowing costs, as these could have lasting economic impacts. This sentiment reinforces that fixed rates may remain relatively high even if the BoC cuts its policy rate.

Variable Rates Might Decrease, but Fixed Rates May Hold Steady

Given the economic environment, variable-rate mortgages seem likely to experience some reduction in the near term as the BoC’s rate cuts gradually pass through. Fixed rates, however, are more influenced by long-term bond yields and economic uncertainties, including the influence of US treasury yields and inflation expectations.

Former TD economist Don Drummond has voiced a cautionary note, suggesting that the ultra-low fixed rates seen in recent years were an anomaly. He expects rates to stabilize closer to historical norms for fixed mortgages as bond yields resist significant downward movement.

Implications for Canadian Mortgage Borrowers

For mortgage holders and potential borrowers, these dynamics underscore the importance of evaluating individual financial circumstances when choosing between fixed and variable rates:

1. Variable-Rate Borrowers: The expected cuts to the BoC’s policy rate may relieve variable-rate borrowers. This rate type may offer savings as policy rates ease in response to economic cooling.
2. Fixed-Rate Borrowers: With bond yields likely to remain elevated, fixed mortgage rates may not experience meaningful reductions. Locking in a fixed rate now could provide stability, especially if bond yields continue to climb due to economic uncertainties.
3. Economic Signals and Currency Dynamics: With the Canadian dollar weakening, partly due to slower economic growth expectations, confidence in Canadian bonds could waver, affecting borrowing costs. Exchange rates between the Canadian and US dollars often reflect broader economic sentiment and may impact future rate forecasts, especially for fixed rates tied to bond yields.

How Mortgage Experts Can Help

The divergence between fixed and variable mortgage rates reflects Canada’s complex economic backdrop. While variable rates may offer more flexibility and potential savings in the short term, fixed rates, guided by bond market trends, may stay elevated. Borrowers must weigh the stability of fixed rates against the potential savings of variable rates, considering current economic forecasts and individual financial resilience.

In the coming months, economic indicators like bond yields, employment data, and the inflation rate will shape the trajectory of mortgage rates. Fixed and variable rates could continue to move independently, making mortgage choices increasingly nuanced for Canadians. Navigating fixed or variable mortgage rates in today’s volatile economic environment can be challenging. Understanding the mortgage rate forecast for fixed versus variable rates is crucial whether you’re renewing or exploring a new mortgage.

Contact nesto mortgage experts for personalized guidance on which rate best suits your financial goals and how to make the most of current market trends. With our knowledgeable and customized advice and access to competitive rates, we’re here to help you navigate these choices confidently.

Are you still deciding whether to go fixed or variable or waiting for rates to drop? Nesto’s Prime Time can help you save with a discounted mortgage payment now while waiting to lock in later. Contact nesto’s mortgage experts to help you choose the best mortgage for your unique needs.

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Why Choose nesto

At nesto, our commission-free mortgage experts, certified in multiple provinces, provide exceptional advice and service that exceeds industry standards. Our mortgage experts are non-commissioned salaried employees who provide impartial guidance on mortgage options tailored to your needs and are evaluated based on client satisfaction and advice quality. nesto aims to transform the mortgage industry by providing honest advice and competitive rates using a 100% fully digital, transparent, seamless process.

nesto is on a mission to offer a positive, empowering and transparent property financing experience – simplified from start to finish.

Contact our licensed and knowledgeable mortgage experts to find your best mortgage rate in Canada.

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