Real Estate

From Peak to Trough: A Two-Year Long Mortgage Rollercoaster Ride

From Peak to Trough: A Two-Year Long Mortgage Rollercoaster Ride

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    The mortgage market is constantly changing, influenced by economic factors like inflation and global events. In particular, mortgage rate changes directly impact the cost of homeownership, mortgage payments, and qualifying ratios. 

    Tracking historical trends can help prospective borrowers and current homeowners make predictions on where the future of interest rates could be heading. This can be particularly useful for homeowners and prospective homeowners to make better long and short-term decisions when selecting mortgage rates and terms.  

    In this post, we will look at the mortgage rate history in Canada from 2020 to the present and at what the experts predict the future mortgage rate forecast may look like going into 2024 and beyond.


    Key Takeaways

    • Mortgage rates have experienced significant volatility over the past few years, responding to global events and economic activity.
    • The COVID-19 pandemic profoundly impacted mortgage rates, driving them to historic lows.
    • Future rate changes are uncertain, with economists predicting rates will remain steady at 5% before gradually decreasing over the next few years to 3.5%.

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    The Evolution of Mortgage Rates and Home Prices from 2020 to 2023

    Mortgage rates play a significant role in the affordability and accessibility of housing, impacting everyone, from individuals to the Canadian economy at large. 

    In 2020, amidst the pandemic and economic uncertainty, the Bank of Canada (BoC) implemented several rate cuts to stimulate the economy. This led to a new low for historical mortgage rates in Canada, creating a surge of refinancing activity as homeowners sought to take advantage of lower rates. This also created a more favourable environment for buyers as the cost of borrowing decreased, making homeownership more affordable.   

    The BoC maintained interest rates at 0.25 throughout 2021. This provided stability and more confidence to homeowners and potential buyers who could still take advantage of historically low rates. In 2022, as inflation rose, the BoC began tightening monetary policy by increasing interest rates to curb sky-high inflation. The BoC raised interest rates 7 times throughout 2022 as inflation remained stubbornly high. 

    Although home sales declined in 2022, home prices did the opposite, peaking at a record 18.8% annual gain in April, breaking the record growth previously recorded in March. In BC, benchmark home prices reached $1,076,400, with Ontario not far behind at $1,045,400. In Quebec, home prices reached $490,100. 

    After home sales peaked in April, they fell for 9 consecutive months. Some metropolitan areas in Canada saw some of their largest price declines not seen since the Great Recession

    January 2023 saw home prices in BC fall to $916,700, a 14.8% drop from the peak in April 2022. Home prices fell even further in Ontario, falling to $852,700, an 18.4% drop in prices from the peak. Meanwhile, Quebec saw a smaller decline, with home prices falling to $450,800, which marked an 8% decrease from the peak. 

    2023 has seen the BoC raise interest rates an additional 3 times so far as inflation remains sticky and above its 2% target. Though the economy is showing signs of slowing, it may still not be enough and further interest rate hikes could still be on the horizon before the year ends. 

    Mortgage Rates in 2020:

    2020 was marked by the unprecedented COVID-19 pandemic, which caused global economic turmoil. As a response, central banks worldwide, including the Bank of Canada, implemented aggressively loosening monetary policy by slashing interest rates to stimulate the economy. Bond yields and fixed mortgage rates followed suit, reaching record lows. Borrowers were presented with an opportunity to secure historically low rates, resulting in a surge in home prices due to homebuying activity and mortgage refinancing.

    Mortgage Rates in 2021:

    The Canadian economy began to recover from the initial shock of the pandemic. However, uncertainties surrounding the ongoing COVID-19 health crisis influenced mortgage rates. The Bank of Canada held rates steady for the year amid the uncertainty.

    Mortgage Rates in 2022:

    As the economy recovered, the Bank of Canada embarked on a path of hawkish monetary policy. In response to rising inflationary pressures, the central bank began raising its policy interest rate, which impacted mortgage rates. Borrowers witnessed a steep climb in rates throughout 2022.

    Mortgage Rates in 2023:

    So far, in 2023, the Bank of Canada has continued its tightening cycle. Mortgage rates have experienced further upward movements. Borrowers face higher borrowing and renewal costs compared to previous years. The biggest risk facing homeowners today is oncoming payment shock due to surging renewal rates. Prospective homebuyers face an 8% or more on a stress test to qualify for a new mortgage today.

    Will Interest Rates Go Up, Down or Stay the Same in 2024-2025?

    Predicting future mortgage rate movements is challenging as it depends on economic growth, inflation, inflation expectations, and global events. While it’s impossible to provide a definitive answer about the direction of interest rates in 2024-2025, we can explore which way rates may go based on current trends and what the experts have forecast.

    According to Bloomberg’s recent survey of economists, higher stable rates are the most likely path for the near future. The economists surveyed predict that the key interest rate will be held at 5% until at least Q3 of 2024. Rate cuts won’t likely happen as quickly as initially anticipated, with the policy rate predicted to be around 3.5% in early 2025. 

    Looking Forward: How to Navigate Uncertainty in the Housing Market

    Higher interest rates coupled with supply and demand concerns put more pressure on an already uncertain housing market. Higher interest rates have eroded purchasing power for first-time homebuyers (FTHB), making qualifying for a mortgage with insurmountably high stress test requirements even harder. For current homeowners coming up for renewal, higher interest rates could mean mortgage payments increase by 50% or more, depending on when they secured the rate they are currently locked into. 

    For first-time buyers, it will be important to get a prequalification to understand how much you can afford at current interest rates. Additionally, prepare a budget and understand the impact each 10 basis point (0.10%) increase in the interest rate will have on your qualifying amount. When looking at homes, buyers should consult a trusted realtor to understand what impact the current housing market is having on average local home prices. Current homeowners up for renewal should shop around and discuss their options with a mortgage expert to secure the best rates. 

    Frequently Asked Questions

    Welcome to our Frequently-Asked Questions (FAQ) section, where we answer the most popular questions designed and crafted by our in-house mortgage experts to help you make informed mortgage financing decisions.

    Should I get a short-term mortgage in 2024-2025?

    Opting for a short-term mortgage from 1 to 3 years can provide flexibility and potential cost savings in a changing interest rate environment. However, borrowers should be aware that short-term mortgages require more frequent renewals, potentially exposing them to future rate fluctuations.

    Should I get a mortgage if rates go down in 2024?

    If interest rates decline in 2024, it could present an attractive opportunity for borrowers to secure a mortgage. Lower rates could result in reduced borrowing costs and lower mortgage payments. However, borrowers should carefully assess their financial situation and consider their long-term plans, budget, and potential future rate increases.

    How does inflation impact rate hikes?

    Inflation plays a significant role in interest rate decisions. Higher inflationary pressures can prompt central banks to raise rates to curb inflation. When the BoC increases the policy rate to combat inflation, this erodes purchasing power, discouraging borrowing and encouraging savings. Inflation can also cause a knock-on effect, putting pressure on non-discretionary spending if your budget is already tight.

    Final Thoughts

    Understanding historical impacts on mortgage rates and staying informed about future rate projections is more crucial than ever for borrowers navigating today’s volatile real estate market. While historical trends provide valuable insights into the direction interest rates may be headed, it is important to keep in mind that future rate movements can be influenced by many events that economists can’t predict. 

    Borrowers should consult with a mortgage expert, stay updated on economic news and trends, and carefully evaluate their financial situation, future goals and risk tolerance when making mortgage decisions. By doing so, borrowers can position themselves to navigate the mortgage market more effectively.You won’t need a crystal ball when buying a home or renewing your mortgage with nesto’s seamless and transparent mortgage application platform. The rate you see is the rate you’ll get. Our knowledgeable and licensed mortgage experts are ready and waiting to advise you on your perfect mortgage!


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