What's going on with mortgage rates in 2024?

Dan Eisner's Rate Prediction

As the summer suns on, rate cuts now dominate the market outlook. Yet interest rates remain high and will take a while to come down.

Economic factors will likely be a relative theme park for the next couple of months — with potentially scary 'number' rides (like the panic from a higher May inflation reading) and tamer concession fare (such as the June unemployment jump to 6.4% from last month's 6.2%).

We hope all tin ducks fall in a row over the next few months so that the Bank of Canada can hold its rate-cutting aim.

June's headline inflation came in lower (2.7% from May's 2.9%) thanks to a slower price pace for gas and durable goods, though price growth for groceries increased for the second month in a row.

The core inflation trim and median average also notched down slightly to 2.75% (from May's 2.8%), offering an incentive for this second rate cut.

Here are some points in favour of a continued course of policy rate easing:

• So far, inflation is declining toward the BoC's 2.0% target rate (a bumpy decline is expected, as long as the trend isn't knocked off-course)
• A warning from some economists that our unemployment rate could reach 7.0% by year-end (a stable economy usually hovers around 6.0%)
• Job vacancies are vanishing faster than concession-stand mini-donuts, indicating more labour market weakening
• Canadian GDP (Gross Domestic Product) growth continues to underwhelm
• Slower retail spending suggests Canadians are holding back over budget concerns
• Signs of U.S. economic cooling across the board
• Higher mortgage interest, rent costs, and property taxes weighing on household budgets and consumer spending
• With over 2M mortgages renewing in 2024 and 2025 into higher rates and costs, this major financial stressor is a concern for the government and the banks

Yet, other economic factors may fly in the face of rate cuts as we go forward:

• Canadian wage growth gained yet again in June by 0.3%, a concerning sign of entrenching inflation (though a lagging indicator that may soon show cooling)
• Federal and provincial government spending and debt levels could impede inflation's decline
• Continued U.S. economic strength could encourage elevated price growth here
• If Canada's rate agenda diverges by more than 1.0% from the U.S. Federal Reserve, it could impact our dollar for an inflationary effect
• Oil prices cracking the $100 ceiling due to global conflict would raise business input costs that are passed on to consumers
• Global weather events could impact supply chains for increased input costs (and then consumer prices)

What will happen at the next rate meeting on September 4? Assuming inflation's decline continues to toe the line, we should see cuts at each remaining rate date for 2024, and resume a downward trend through Q1 of 2024. The size of cuts at each BoC meeting may increase if the economy slows faster than anticipated.

I'm holding onto a forecast of Canadian prime rates falling by about 1.5% into the first quarter of next year and continuing to fall another 0.50% (for 2.0% in total) by the end of 2025

At the moment, economists project an eventual higher neutral-rate resting point of 3% (up from a projected 2.5%).

The 'neutral rate' range could be a moving target over the coming months. We'll keep an eye on the numbers and update the total drop estimation as we go.

Is there a danger that the prime rate will increase again in 2024? There's always that danger, though the economic softening underfoot likely means it'll be a no-show band.

A year from now, we hope to have much lower rates, assess the impact of all these hikes, and wonder where the economy will go from there.

What can affect BoC's rate decisions?

Our central bank wants to see good news in the form of cooling numbers all around to continue its rate drop cycle:

• Good news (Inflation) – June's headline annual inflation rate cooled to 2.7% (from 2.9% last month), with core inflation also receding slightly (next reading Aug 20)
  
  
• Good news (Jobs) – Our June labour market lost 1,400 jobs (after May's increase of +27K) and the unemployment rate rose by 0.2% from May to 6.4% for the highest level in two years (next reading Aug 9)
  
  
• Concerning news (Wages) – Despite the cooling job numbers, average wage growth shot up to 5.4% in Jun (from May's 5.2%), increasing worries of entrenching inflation (next reading Aug 9)
  
  
• Good news (Economic growth) – April's GDP was in line with expectations at 0.3% growth after a flat March; Q1 2024 came in at +1.7% (BoC expected 2.8%) (May reading on Jul 31; Q2 comes on Aug 30)
  
  
• Good news (Bond yield market) – Canadian 5-year bond yields have fallen to around 3.2% in response to the lowered Bank of Canada policy rate

When will fixed rates go down?

Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates, and are the reference in this section and blog.

Bond yields have dipped to around 3.2% after the central bank's second rate cut on July 24 — bringing more rate relief to Canadian budgets in earnest following a turnaround decline in June headline inflation (2.7%) from May (2.9%). Plus, lowering U.S. inflation (June came in at 3.0% from May's 3.3%) is helping to ease economic pressure.

The BoC's first rate drop on June 5 was sparked by:

• A flat March Canadian real GDP reading following February's 0.2% growth, plus less-than-expected growth of 1.7% for Q1 2024 (BoC had forecast 2.8%)
• Headline and core inflation trending toward the BoC's 2.0% target
• Signs that U.S. economic strength is losing steam

The first U.S. rate drop is now pegged for any time between September and year-end (which could change quickly if their inflation decline continues). So far, a rate-policy divergence of at least 0.50% is forecast, with speculation that it would take at least a 1.0% difference before the Canadian dollar suffers to set off an inflationary effect.

The Bank of Canada (as always) remains concerned about inflation's path, including the potential impact that a surge in housing market activity could have on home prices.

Will there still be bumps in the road? Bond yield volatility is considered 'normal ' during a prime-rate drop cycle. The bond market is particularly reactive to immediate factors or sentiment, triggering bond sell-offs in a snap and a fixed-rate rollercoaster (in a tight range) in response.

If yields jump up, look for a (delayed) fixed rate increase. Lenders are closely watching their costs and retaining capital to deal with the potential for increasing debt arrears.

How far will fixed rates fall when the prime rate drops? Variable rates (that float with changes to bank prime rates) have more room for decline than fixed rates, which have already fallen in anticipation of lowering prime rates.

Also, variable rates are currently higher than the stalwart 5-year rate, which isn't normal (usually, variable rates are lower than fixed, at a spread of about 0.25% to 1.0% due to the increased risk of change). So there may be a 0.5% to 1.0% fixed-rate decline waiting — but don't count your rate chickens until we see how the economy reacts to rate drops.

Get a rate hold now!

If you're considering buying a home or renewing sometime in the next few months, talk to one of our expert brokers about getting a rate hold. It could protect you from rate volatility, and you'll still get a lower rate if it goes down during your hold.

Can the U.S. economy affect rate hikes here?

The U.S. economic landscape seems to be more strongly resisting its higher rate environment, with a more robust jobs market and stronger GDP (though experts say there is weakening afoot).

Regional banks there are still at risk thanks to commercial real estate woes (high renewal rates and depressed values due to lower occupancy). U.S. Inflation finally seems to be bending to higher rates, with the U.S. Federal Reserve eyeing rate cuts before year-end.

Why do we care? Economic conditions south of the border can pile on factors weighed by our central bank (and drive higher prices here) to affect its rate decisions.

Will Canada see a recession?

Despite the constant, distant calls of the 'recession' loon, it hasn't flown into our backyard yet. That doesn't mean the trajectory for a soft landing — meaning no recession or a very mild one — is an absolute. Nothing is ever certain in love or economics.

Back in October 2023, the Bank of Canada referred to projected economic faring as 'low positive growth' that will walk the line and possibly dip into negative territory (but not as a full-blown 'recession'). So far, that's coming true, with a 2024 GDP that's skimming above the line.

There's optimism that market resilience might keep our economy out of recessionary territory. Experts had projected a mild recession through the first half of 2024, which did not materialize. However, sustaining these higher rates for too long may jeopardize the possibility of a soft landing.

A recession would bring mortgage rates down faster.

If economic weakening accelerates beyond expectations, the BoC would drop prime rates faster, providing more budget relief when we'll likely need it most.

Stagflation isn't expected to stick a landing.

Stagflation, a period of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. According to the BoC, "it's not where we are now" as our inflation isn't high enough, having come down to around 3% from over 8%, and with a (still) relatively low unemployment rate.

OSFI has added a new LTI limit for banks that may affect you

For 2024, OSFI (Office of the Superintendent of Financial Institutions) has pledged to keep its eye on lender (and homeowner) protections, not ruling out a stress test change — but it likely won't budge. With any proposals it does make, implementation likely won't happen for weeks or months, after it consults the industry and lenders prepare for changes.

• In March, OSFI declared an LTI cap will go into effect for Q1 of 2025. It's aimed at preventing banks from accumulating too many 'highly leveraged' uninsured mortgage loans with an LTI over 4.5 times a borrower's income as rates decline. New mortgages won't be measured directly (like the federal mortgage stress test), but home buyers may find themselves on the receiving end of higher uninsured rates if they exceed the LTI OR a rejected mortgage approval.
  

Does True North anticipate an increase in mortgage activity?

The higher rate environment has dampened affordability. Even though many Canadian home buyers and owners are holding off on plans to buy or move, some are finding deals to get ahead of a potential housing market rush as prime rates ease off and variable rate discounts grow.

As always, we offer great rates and specials, and we're attracting many mortgagees who look to lower their monthly costs while taking advantage of housing deals in their area.

Predictions are mixed about the effect lowering rates will have on housing prices. More sellers may list to get out of restrictive rates, yet markets will face more demand due to the highest immigration numbers Canada has seen in years. Rates and home prices are elevated enough for some to consider delaying their buying intentions until next year when the mortgage stress test will be even lower (as prime rates lower).

Depending on your details and needs, our low short-term 6-month and 1-year Rate Relief™ products can help you bridge the gap with budget relief now, enabling your dream-home buy sooner, with the hope of renewing into lowered market rates.

Read more here about how high mortgage rates may impact the 2024 housing market.

My mortgage advice for 2024? Shop for your best rate — and consider a variable one.

Around 2M Canadians are coming up for renewal in the next couple of years. Even if rates go down in 2024, homeowners will still take a budget hit from renewing at higher rates than they had previously.

The most important thing you can do in this market is shop around for your best rate and product. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage.

We exist to do the comparing on behalf of our clients, checking with several accredited and alternative lenders for the best solution and budget fit for their needs, while passing along a volume rate discount. We're fast, we speak several languages, and we're very good at what we do — which is why we have so many 5-star reviews.

First-time home buyers especially need expert advice to set them on a path to successful homeownership amid these price pressures.

Which rate should you choose? Variable rates are trending down and can offer instant budget savings versus locking into a 5-year fixed rate and watching rates drop from the sidelines. You can always lock into a shorter fixed rate if you get too nervous.

Owning a home is a tremendous source of pride in Canada. I created True North to provide clients with a better mortgage experience and save them thousands with their best rate and mortgage choice.

Have questions about 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 15,000 5-star reviews from our happy clients.