At the time of writing during the second week of November 2022, many financial pundits were surprised when Canada and US job numbers did not translate to a slowing economy as expected. Truthfully, the impact of any rate increase can take up to a year to impact the whole economy. Even with all the crushing blows by surging interest rates that central bankers on both sides of the border have thrown at it, the economy has continued its relentless overflow with inflation and employment.

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Key Takeaways

• The quick, surging rate increases by the Bank of Canada (BoC) will likely create a recession in the near-to-medium term.
• Historically mortgage rates in Canada are forecasted to sink to lows.
• Market prediction is a 50 bps to 75 bps rate hike between December and 2023 forecasted by the BoC.
• Early signs of the economic slowdown might not be apparent until March 2023 as it could take up to a year from the first rate increase.

Bank of Canada Interest Rate Hike Predictions for 2023

We can expect rate hikes to continue until inflation has tamed over the year. We will likely not see a measurable decrease in inflation during the next 4 months as the impact of rate increases make its way through the economy. As inflation is a lagging indicator, it may not adjust to the will of the BoC until sometime in March 2023. Inflation is still demonstrating increasing demand due to economic growth, and the prices are rising to indicate growing demand. 

As most of our consumer goods are sourced from China, the current increase in demand may be due to additional pent-up demand from the pandemic. It is important to note that inflation has continued to be untamed due to the war in Ukraine and the domino effect on gas prices and supply chains. Government health and defense spending has also added fuel to inflationary pressures since the start of the Ukraine war. Recent talk of Russia backtracking in Ukraine and China relaxing its stance on COVID-19 has made the likelihood of a turnaround more likely.

Historical Context: What Does a Slowing Economy Typically Mean for Mortgage Rates?

Historically, during the last recession in 2008, the financial system needed a bailout to fix. Thankfully, this bailout worked, and since that time, we have enjoyed lower interest rates but stagnant GDP growth. COVID-19, with its border closures and labour slowdowns due to safety measures, needed a much more significant bailout. Over the two years since COVID-19 started, we have enjoyed record-low rates and so much cash infused into the economy that Canadians could increase their spending on everyday items – thus creating surging home prices.

The COVID-19 shutdown of the economy and supply chains has increased the demand for much-needed supplies. Our demand outstripped supply with lower interest rates and bigger cash flows, creating high inflation. As inflation is a lagging factor and Statistics Canada measures inflation differently for existing homes, it became apparent that inflation was quickly running. As the BoC started playing catch up, they started ramping up the federal key policy interest rate to curb inflation as soon as possible.

What’s different about these rate increases compared to the 1980s? Well, in the 1980s, we did not have the same debt levels. Today, Americans make $1 for every $1 of debt, and Canadians make $1 for every $1.65; North Americans were not as indebted as back in the 1980s. Say you had a $100,000 mortgage, and your income on average was around $20,000 – your monthly payment on your mortgage was likely less than $800 at 10% if you had a 35-year mortgage or, say, $1600 if rates increased to 20% on that same mortgage. And back then, credit cards and HELOCs were not as much in use, so likely, mortgage debt was all you had. 

So as rates jumped from 10% to 20%, their impact doubled. However, now the effect might be many more folds magnified. An increase in rates from 0.25% to 4.50% on the BoC’s Key Policy Rate could mean a magnification of 18x. 

Long-Term Mortgage Rates Forecast for 2023

The rate increases and their magnifying effects have not made it through the economy – as it can take up to a year. We will likely see this for the first time in March, a year from the first rate increase in April 2022. As this shock is felt in the economy this coming year, it may come as a tonne of bricks slowing it down close to a standstill.

Although not ideal, a slowing economy with a drop in inflation and job gains will force the BoC to start winding down its Key Policy Rate again by the end of 2023 or the following year.

Bond yields indicative of the expectations of the move that the BoC will make will be the first to price in the reduction in rates. The 5-yr rate is likely the first mortgage rate to start its descent once the BoC reverses course. In other words, the bond market will price the yield in anticipation of the direction the BoC’s Key Policy Rate is expected to take.

Navigating High-Interest Rates to Save Money on Your Mortgage

As the full effects of the interest rate hikes will be felt over the next year, it will impact consumer demand. As demand drops, so will the rates; navigating them to save money will depend on your specific situation. 

What goes up must come down – but might not come down fast enough for everyone. Mortgage rates are projected to come down but may not work perfectly into the timing of most mortgage renewals in Canada. Especially those variable-rate mortgage holders who were most affected by rate increases if they qualified in 2021.

Utilizing Fixed-Rate Mortgages to Reduce Interest Rate Risk

Conventional thinking is locking yourself into a fixed-rate mortgage at the first sign of downward rates. But as discussed above, if inflation is a lagging indicator and bond yields are a leading factor, then waiting for the right moment to lock in may be the most suitable way to move forward. A calculated method is to position yourself to take advantage of lower rates – it is the best option for anyone looking to navigate this tumultuous rate environment. 

According to the BoC, it may take 1 to 2 years to tame inflation, so riding out your mortgage on a shorter fixed term could be a good option, but then you may end up having to lock in again as the rates would not have hit their lowest point. Therefore, it makes strategic sense to lock in for a bit of a longer term, say 2 to 3 years, to give inflation more time to settle down.

Utilizing Variable-Rate Mortgages to Reduce Interest Rate Risk

Regardless of which rate you choose, your goal should be to be in a better financial position than you were before – or as best as possible in your current financial situation. Therefore, if you decide to take a variable-rate mortgage, then it would be best to set your mortgage payment based on the current fixed rate that is being offered. As long as your variable rate remains lower than the fixed rate you were being offered, you will come out ahead.

This way, once inflation starts heading down again, and rates revert back to their downward trajectory, you will be rewarded further as the BoC reduces its Key Policy Rate.

Mortgage Rates Forecast for Buyers and Sellers in 2023

It’s probably best not to have specific expectations from the economy – even the experts keep missing the mark on predictions. The Bank of Canada (BoC) has been neck-in-neck with the US Federal Reserve (Fed) on the rate increase, which has kept the CAD devaluation to a minimum of 10% against the greenback this year. In contrast, other G10 economies have not been so lucky as their central banks did not advance rate increases as quickly as the Fed.

The fear of buying too early in this rate cycle may leave homebuyers on the sidelines for too long before it’s too late. Once the home prices are on the rebound, the purchase costs will be higher – creating a pay later but having to pay more overall and be left with lesser cash savings. Comparatively, a 2% rate increase in the monthly payment now might mean lower interest-carrying costs overall for the life of the mortgage while using part of those cash savings towards managing higher monthly payments during your locked-in period.

If you are looking to sell and have more than 50% equity and a very healthy cash flow, then deferring your decision for a year or two with a shorter-term or variable rate option until house prices bounce back will make the most sense. But keep in mind that nothing is for sure, and homes may not bounce back to 2021 levels – they were in a bubble in some coveted urban regional markets.

Mortgage Rate Predictions Over the Next 5 Years

By the end of 2024, we suspect that rates will start stabilizing once again – normalizing back to the pre-pandemic levels. It doesn’t mean that mortgage rates will be priced with the same factor of risk as if nothing else. These recent gyrations have indicated that the economy is quite fragile, and many factors remain outside the BoC’s control. 

Depending on the increase in supply and demand for homes, another factor dependent on the economy as well, mortgage rates will move in tandem with inflation. One thing that remains certain is that there is an endemic lack of supply of homes, and this will keep putting upward pressure on inflation – especially if consumers can’t afford to buy them, so they decide to spend their money on other things.

Mortgage Shopping Tips to Save On Your Mortgage Renewal or Refinance

If you are up for renewal, your mortgage rate should be selected based on your financial goals for your home. Your choice of a rate will also depend on stress testing of your mortgage if you choose to switch lenders. Picking a lower rate to ride out the term can impact you with a higher rate if you have to renew again with the same lender, especially if the lender knows they have you pigeon-holed due to stress-testing requirements. Make your decision based on your needs first – if you don’t plan on selling or moving, then go with a longer term. Conversely, if you think you might need to move, go with a term that works for your situation and shop for the best rate. We would recommend speaking honestly with a mortgage expert to see the most suitable option for your situation.

You should look at your overall risk between fixed and variable options if rates stay and don’t move down. If you are advanced in your life stage with built-up home equity, net worth, and free cash flow, then choosing a variable rate option may work for your situation. However, if you are a first-time homebuyer (FTHB), I would always recommend going with a fixed rate to avoid any drastic increases to your most significant monthly obligation – your mortgage payment.

Frequently Asked Questions

Final Thoughts

Mortgage rates will go up and down as they have since the invention of mortgages. When it comes down to it, it’s not the rate that matters but how much of your disposable income goes to servicing this hefty obligation. It should be your goal to keep your mortgage payments predictable and make them manageable for your budget and their longer-term feasibility for your financial plan. When deciding on a mortgage, your decision should be informed; with this in mind, we recommend that you speak with an expert before making your decision.

Our commission-free mortgage experts at nesto will provide you with honest and transparent advice – nurturing and guiding you throughout this challenging decision-making process.

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