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What's going on with mortgage rates in 2023?

After 2022's rate explosion, Dan Eisner speculates on what this year may have in store.

Inflation is (finally) easing. Have mortgage rates hit their peak? Can we look to any relief in the coming months? Here's what I see.

Dan Eisner
TNM Founder and CEO
More about Dan

As Founder and CEO of True North Mortgage, Dan is a mortgage industry innovator and an entrepreneurial machine, to say the least.

If the rate hikes are over, we may still come in for a soft landing.

All the time, I'm asked about rates. That makes perfect sense. We've built True North Mortgage as the brokerage that can offer access to the lowest rates around, with a simple, fast, client-focused service — and many of our competitors have tried to copy us ever since.

Rates in 2022 went up by 4.0%. That's the most in one year since the '90s. At this point, we're all hoping the hikes are done. But are they?

Here's my rate prediction

In December 2022, the Bank of Canada (BoC) went for a larger 0.50% hike (instead of a softer 0.25%). To assuage desperate Canadians, they also let out a whisper (after a hard year's work) that they may be ready to stop.

What's troubling our central bank? It would be our very low unemployment rate. Despite spending and inflation trending lower, the strong labour market has the BoC wary that inflation may get sticky on the way down or start to trend back up.

So for (hopefully) a last kick at the tire, there will likely be one final rate push of 0.25% left for its January 2023 meeting to bring its policy rate to 4.50% (with bank prime rates likely at 6.70%, not factoring in any variable rate discounts that lenders like us may offer).

And then I see the BoC resting there for a while, until toward the end of 2023, with fixed rates easing a little along the way — assuming that inflation tracks a steady decline and job losses don't start really mounting.

"Keep in mind that predicting interest rates is a 50/50 game, but if we don't attempt to forecast, we can't help prepare or protect our mortgage clients."

A soft landing is a magical thing.

All the central bank's machinations and efforts could magically line up with the right numbers for a glowy-soft economic touchdown — which is not what many are expecting after the market turmoil of this past year. But if it did happen, we'd all 'ooooh' and 'ahhhh' at the wonder of it, especially amid concerns that financial policies could end up pushing already-tight budgets over a cliff.

What does a soft landing mean? It would mean that despite the fast ratcheting of rates, we wouldn't dip into a recession, or at least only have a very mild one. Canadians would (mainly) keep their jobs — though the unemployment rate would likely normalize from current lows. Inflation would come down, and home prices would stabilize.

We'd still have to continue adjusting to the higher-rate environment — especially those coming up for renewal from previously much lower mortgage rates — but we'd all breathe a collective, economic, Canadian sigh of relief that an end is in sight. And then drum our fingers on a table for rates to start coming back down.

But we're still bracing for a hard thud.

If inflation doesn't slow down enough, the central bank may continue to raise rates into the first quarter of 2023. (They've said numerous times that their only concern is getting inflation under control, regardless if it sparks a recession.)

The higher rates go, the higher the possibility of a more severe or protracted recession. That would inflict even more consumer pain as rates stay high and job losses mount, all adding troubling financial pressure amid higher Canadian household debt levels.

A hard thud would come with better news for mortgage rates. The Bank of Canada would finally have good reason to back down, perhaps quickly, providing some rate relief when we'll likely need it most.

Fact: A recession is technically considered an economic contraction reported for at least two financial quarters in a row, but typically a pronounced and persistent period of economic decline


Where will fixed rates go?

Bond yields, the primary influencer of fixed mortgage rates, are considered forward-looking, in that they 'anticipate' where the market may be going. And for the past month or two, yield numbers have been seeing nothing but lower rates in our future (with atypical curve inversions across the board).

You can watch the slight fluctuations in 5-year bond yields in reaction to the latest economic news — such as BoC or U.S. Federal Reserve comments, or inflation or unemployment readings. For now, yields are waiting for the inevitable: a soft landing or hard thud that will signal an about-face in the central bank's rate agenda.

As time goes by, if our central bank does rest its rate-hike campaign, fixed rates may slowly decline as 2023 plods along, maybe as much as 0.50% for the commonly-chosen 5-year fixed term.

Some of our fixed mortgage rates are actually lower than our variable rate, another atypical inverted spread that will likely continue a few months longer.

Could recently proposed changes to the mortgage stress test make it harder to get approved?

In January 2023, OSFI (The Office of the Superintendent of Financial Institutions) proposed changes it would like to enact that would further tighten the required mortgage stress test and the rules governing it.

If some of their proposals go through (they likely would come into effect in the 3rd quarter of 2023), lenders would apply more stringent qualifying limits and have even less flexibility to make (warranted) case-by-case exceptions to federal stress-test regulations. More potential home buyers would be locked out of prime mortgages with regulated lenders. That means those buyers on the cusp of affordability would either have to consider alternative sub-prime lending with higher rates — or continue renting for longer.

If rates come down at some point, it could help offset these mortgage-muzzling rules. But we here at True North wonder why OSFI is considering these increased restrictions when banks are already well-prepared for future rate or mortgage default increases.

Want to hear more? Listen as I discuss OSFI's proposal with Ben O'Hara-Bryne on his January 13, 2023 podcast, A Little More Conversation.

Does True North anticipate more mortgage-buying activity?

So far this year, our mortgage transactions have suddenly picked up for a January record. Those who have been waiting on the sidelines perhaps agree that the majority of rate hikes are behind us. Plus, with home prices coming down from a 2022 peak, it looks like buyers are wading back in before the typical spring home-buying rush increases competition.

The housing market may also see a bump up in home sales from those seeking to get in ahead of possible OSFI restrictions coming.

A better outlook for home buyers in 2023 (so far).

I do see a more positive year ahead of us after a roller-coaster 2022 (fortunately, many have been able to hang on — and we've helped several clients realign their mortgage budgets and needs).

Many Canadians will start to feel comfortable as they adjust to rates as they are now (assuming the BoC is truly done pushing them up), and cautious buyers and sellers will enter the market once again, thinking that the 'worst' may be over.

Whether home prices normalize from last year's peak (and fall) will depend on the housing inventory available to meet an uptick in demand we expect to see.

We also hope that home buyer conditions on purchase offers stay in 'vogue' (no resurgence of no-condition or bully offers, or extreme bidding wars), so Canadians can better protect themselves from financial surprises or setbacks.

Owning a home is a tremendous source of pride in Canada, and we want every client to enjoy their experience in making it happen — along with their best rate and mortgage to help save thousands.

Have questions about where rates are going and how it may affect your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 12,000 5-star reviews from our happy clients.

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