What's going on with mortgage rates in 2024?

Dan Eisner's Rate Prediction

As the fall season approaches, interest rate cuts now dominate the market outlook.

Like the shorter nights and cooling temps, several economic factors are slowing all around us.

That's not good news for the economy — though some good news could come in the form of faster BoC (and more) prime rate cuts.

The weakening economic factors playing into this rate-cut cycle.

Canada's headline inflation rate came in below 'target' in September. Much sooner than anticipated.

With inflation cooling to 1.6% from August's 2.0%, is there any excuse now for the BoC to keep these restrictive rates so high?

This latest favourable headline inflation reading is thanks to base-year effects for gas (the price increase for this CPI component was much higher last year, which makes this September's increase look lower in comparison). The items excluding gas rose about the same as last month, with groceries still logging a faster pace than the headline at 2.4%.

Keep in mind that just because Canada's pace of average price increases has fallen below the BoC's target, that doesn't mean things are suddenly cheaper for Canadians. According to Stats Canada:

• Compared to September 2021, the CPI rose 12.7% this September
• Rent today is +21.0% costlier nationally
• Food purchased from stores is +20.7% more expensive, increasing substantially during this same 3-year period

There's now a line drawn in the leaves: Falling interest rates could help give households some needed relief when looking over bills at the kitchen table (as long as the inflation rate continues to behave).

And, the BoC's just-released consumer and business surveys show inflation expectations are continuing to improve, adding more fuel to its rate-cutting rationale.

A welcome Canadian jobs nudge?

The September unemployment rate fell by 0.1% from August to 6.5%, the first decline this year. Jobs gained by +47K, including a slight improvement in the youth sector (+33K). Wage inflation cooled as well (see below), another nod to the work of (now overly) restrictive rates.

This positive jobs development is just one month, but may actually encourage the BoC in its rate agenda. Getting rates out of restrictive territory faster could help avoid recessionary woes.

Economic growth is projected to walk the recessional line.

The forecast growth for Q3 isn't looking very hot, with lower projected growth despite a slight uptick last quarter, and far below economic potential considering the population increases Canada has seen in the last couple of years. Walking a line of zero growth could mean a dip into economic contraction (two such quarters strung together equal a technical recession).

U.S. economy and rate-cut pace.

Like it or not, our countries' economies are closely tied together, including the impact of the two rate agendas on the Canadian dollar. With U.S. inflation continuing a cooling trend and a recent strong labour report, the U.S. Fed's dual mandate of lower inflation and a strong job market means more cuts are likely on the way.

Faster U.S. cuts could pressure Canada to follow suit.

Canadian Housing Markets.

So far, nationally, housing markets have had a tepid response to the first few rate cuts, keeping home prices relatively stable for now. Sudden housing fervour could halt or pause rate cuts.

Will new mortgage rules recently dropped by the federal government spur more housing activity this year or into 2025?

The potential for economic jump-scares is never completely out of sight:

• 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 could be passed on to consumers (currently, oil prices are nowhere near that height)
• Global conflict, weather events, labour strikes, and trade wars could impact supply chains, resulting in higher input costs (and then consumer prices)

What will happen at the next rate meeting on October 23?

There's increasing talk that a bigger cut of 0.50% is a strong potential before year-end to jumpstart the economy. Many are expecting it to come at this week's rate meeting. It's possible the BoC is still concerned that average core inflation didn't budge in September, but really, the time has come to ease rates faster.

Assuming the monster cut does happen, expect a least a 0.25% rate cut at the last BoC rate meeting for 2024.

(We've seen a monster hike of 1.0% in Canada during the past two years, though that sizable jump down is less likely to happen.)

Where will rates go in 2025?

Assuming inflation continues to toe the line, rate drops of 0.25% will likely resume through Q1 of 2025 (at least).

For a while now, I've held a forecast of Canadian prime rates falling from peak by about 1.5% into the first quarter of next year and continuing to fall another 0.50% — for 2.0% in total.

I'm revising that forecast for a resting rate of 2.50% by the end of 2025.

Remember all that underlying weakness I mentioned month after month when the policy rate was so high? It's now coming on like a charging rhinosaurus — with the Bank of Canada's governor, Tiff Macklem, even suggesting rate cuts may need to go farther than originally thought.

Many economists currently gauge the neutral rate to be around 2.75% (where the economy is neither stimulated nor repressed), and rates will likely need to go lower to stimulate the economy.

Is there a danger that the prime rate could increase, despite talk of more cuts?

There's always that danger, though the widespread economic softening already underfoot makes it unlikely for at least the next few months as rate cuts work their way through the economy.

A year from now, we hope to have much lower rates and wonder where the economy will go from there.

What can affect BoC's rate decisions?

Our central bank wants to see cooling numbers all around to continue its rate drop cycle:

• Cooling, cooling, cold? (Inflation) – September's headline annual inflation rate was down 'past' the BoC's target to 1.6% (from 2.0% last month); core inflation (median and trim average) was unchanged from August at 2.4% (next reading Nov 19)
  
  
• Warmer (Jobs) – Canada's September labour market gained +47K jobs (after August's +22K gain), and the unemployment rate declined by 0.1% to 6.5%, the first decrease since January 2024 (next reading Nov 8)
  
  
• Cooling (Wages) – September's average wage growth continued a downward trend to 4.6% (from August's 5.0%) (next reading Nov 8)
  
  
• Lukewarm to the touch? (Economic growth) – July's GDP growth reading was up to 0.2%, following a flat June (August is projected to be flat as well); Q2 GDP surprised higher at 2.1%; however, Q3 results are forecast to come in much lower than the BoC's initial forecast of around 2.8% (Aug reading on Oct 31)
  
  
• Slight cooling (Bond yield market) – Canadian 5-year bond yields are hovering around 2.9% following Canada's better September labour report and below-target headline inflation, ahead of this week's BoC rate decision.

Are fixed rates coming 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.

Canada's 5-year bond yields are hovering around 2.9% following better September news, both in the jobs market (unemployment down to 6.5%) and year-over-year headline average price inflation (down to 1.6%) and ahead of the BoC's rate announcement this Wednesday.

The U.S. also posted a strong September: their unemployment rate fell to 4.1% with +254K jobs created, and inflation declined to 2.4%.

These recent factors will likely help both countries continue the prime rate decreases, though the 'pace' will still be decided week by week, as market volatility continues.

Bond yield pressures are still on the fall radar, including ongoing geopolitical conflict that could impact oil prices. Major weather events could cast future economic mayhem, threatening new supply shocks or fueling demand and price increases as companies get to work to rebuild.

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 as the prime rate drops?

Fixed rates have made their main declines, with perhaps a bit more room to come down over time if the BoC stops its rate cuts below the neutral rate (currently thought to be a policy rate of around 2.75%) by the end of 2025.

Variable rates (that float with changes to bank prime rates) have more room for decline than fixed rates. They're still 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.

We may see the best 5-year fixed rates stabilize into the mid-to-high 3's as prime rates make their way down to a more typical spread relationship.

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 is finally relenting to the pressures of higher rates, with declining inflation and a more downtrodden jobs market than they've seen in months.

Regional banks there are still at risk thanks to commercial real estate woes (high renewal rates and depressed values due to lower occupancy).

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 quite 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 soft landing. Our labour market is showing wider signs of system stress, as fewer companies plan to hire, and more may commence layoffs to shore up expenses.

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.

Mortgage rule changes in 2024 will offer more help to home buyers and owners.

Along with an anticipated period of declining interest rates, a spate of new mortgage rules should help improve affordability for some home buyers and enable more homeowners to save on their mortgage renewals:

Starting December 15, 2024:

• An increase in the home-price cap from $1M to $1.5M for insured mortgages (for primary and secondary home purchases, not investor purchases) will allow less than a 20% down payment in more expensive markets.
• First-time and all new-build buyers can extend an insured mortgage to 30 years from the standard 25-year amortization, which will help lower mortgage payments and improve stress-test qualification.
  

• For uninsured mortgage switches at renewal, OSFI's federally-required mortgage stress is no longer required, allowing more homeowners to find a better deal.

Starting January 15, 202

• Eligible homeowners will be able to access an insured refinance for up to 90% of their 'improved property' value (capped at a $2M home value) for construction funds, and extend to a 30-year amortization.

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 are listing to get out of restrictive rates, yet markets still 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 the prime rate lowers over the coming months).

Depending on your details and needs, our low short-term fixed Rate Relief™ product can help you bridge the gap with budget relief now, enabling your dream home purchase 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 within the next couple of years. Even if rates continue to go down in 2024, homeowners will still take a budget hit by renewing into higher rates.

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 at each rate cut 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.