Canada Mortgage Interest Rates Forecast 2024
What You Should Know
- From 2009 to 2021, a confluence of disinflationary forces resulted in historically low interest rates.
- During the 2021-2023 period, failures of the supply chains, together with extraordinary government spending, resulted in a bout of inflation.
- The 2022 peak in inflation resulted in the fastest rate hike cycle in Canadian history.
- 2024 has seen and will continue to see a process of declining both inflation and interest rates.
What Will Mortgage Rates be in 2024?
See WOWA’s mortgage interest rate expectation/forecast in this table
| Date | BoC Rate | Prime Rate | 5-Year Variable | 1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 5-Year Fixed |
|---|---|---|---|---|---|---|---|
| 2024-07-24 | 4.5% | 6.7% | 5.83% | 6.59% | 6.39% | 5.74% | 5.34% |
| 2024-12-31 | 4% | 6.2% | 5.05% | 6.16% | 5.54% | 4.78% | 4.43% |
| 2025-06-30 | 3.5% | 5.7% | 4.55% | 5.78% | 5.29% | 4.61% | 4.36% |
| 2025-12-31 | 3.25% | 5.45% | 4.3% | 5.54% | 5.14% | 4.52% | 4.35% |
| This table is populated based on the forward short-term lending rates on July 27, 2024. These forecasts change frequently as market prices change. In making these forecasts, we have assumed the risk premium and the term premium to stay constant and market expectation of the risk-free rate to be correct. | |||||||
| 1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 4-Year Fixed | 5-Year Fixed | 5-Year Variable | |
|---|---|---|---|---|---|---|
| 6.47% | 5.97% | 5.27% Get Up To $4,100 Cash Back* With A New Mortgage. | 5.19% Get Up To $4,100 Cash Back* With A New Mortgage. | 4.96% Get Up To $4,100 Cash Back* With A New Mortgage. | 6.11% Get Up To $4,100 Cash Back* With A New Mortgage. |
| Term | Rate |
|---|---|
1-Year Fixed | 6.47% |
2-Year Fixed | 5.97% |
3-Year Fixed | 5.27% |
4-Year Fixed | 5.19% |
5-Year Fixed | 4.96% |
5-Year Variable | 6.11% |
| 5-Year Fixed | 5-Year Variable | |
|---|---|---|
| 4.96% Get Up To $4,100 Cash Back* With A New Mortgage. | 6.11% Get Up To $4,100 Cash Back* With A New Mortgage. |
| 5-Year Fixed | 5-Year Variable |
|---|---|
4.96% Get Up To $4,100 Cash Back* With A New Mortgage. | 6.11% Get Up To $4,100 Cash Back* With A New Mortgage. |
| 1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 4-Year Fixed | 5-Year Fixed | 5-Year Variable |
|---|---|---|---|---|---|
| 6.34% | 5.39% | 4.59% | 4.69% | 4.39% | 5.4% |
| Term | Rate |
|---|---|
1-Year Fixed | 6.34% |
2-Year Fixed | 5.39% |
3-Year Fixed | 4.59% |
4-Year Fixed | 4.69% |
5-Year Fixed | 4.39% |
5-Year Variable | 5.4% |
The Overnight Rate
The most important interest rate in the Canadian economy is the overnight interest rate. The overnight interest is the annualized rate of interest charged in the overnight market. Participants in the overnight market may include Canadian banks, Canada’s asset managers, Canada’s brokers, Canadian insurance companies, retirement funds and any financial institution. Overnight lending in Canada is typically against the security of government of Canada securities (bonds and treasury bills).
For some Canadian financial institutions, overnight rates are the cost of capital as they fund themselves through the overnight lending market. For other institutions, overnight rates determine their opportunity cost of Capital. Thus overnight rates affect most lending and borrowing rates in Canada.
The yield of risk-free bonds in Canada is often composed of an expected compounded overnight rate plus a term premium. The expected compounded overnight rate is the cost of capital, and the term premium is the premium a borrower pays to insure themselves against an unexpected rise in the rate of interest.
Forward Interest Rate Curve
As of June 28, 2023
Bank of Canada’s Role
Because of the importance of the overnight rate in the Canadian economy, the Bank of Canada (BoC) implements its monetary policy by setting a target for the overnight rate. In addition to the target for the overnight rate, BoC sets the deposit rate and the Bank Rate. The deposit rate is the rate of interest paid by the BoC to commercial banks, while the Bank Rate is the rate of interest charged by the BoC to commercial banks.
As of January 2024, the overnight and deposit rates are 5%, while the Bank Rate is 5.25%. Each year, BoC announces eight dates as fixed announcement dates (FAD). Normally, any change in monetary policy is announced in one of the FADs. The overnight rate cannot descend below the deposit rate as commercial banks can deposit their money with the BoC instead of lending it in the overnight market; they can even borrow in the overnight market and deposit it with BoC if the overnight rate is to fall below the deposit rate.
The overnight rate cannot ascend above the Bank Rate as chartered banks can borrow from the BoC instead of borrowing in the overnight market; they can even borrow from BoC and lend in the overnight market in the unlikely event that the overnight rate climbs above the Bank Rate.
BoC currently uses a floor system, which sets the target rate equal to the deposit rate. Suppose a liquidity shortage pushes the overnight rate higher than the target rate. In that case, BoC will intervene by lending into the overnight market and bringing the overnight rate back close to the target rate.
Bank of Canada has various roles to play in the economy and multiple targets to pursue. BoC’s highest priority is price stability, and its second highest priority is maximizing employment in the Canadian economy. The overnight target rate is the primary tool the BoC uses to achieve its inflation target.
For over two decades, the BoC has been targeting inflation such that the consumer price index (CPI), as defined and measured by Statistics Canada, increases by 2% per annum. If CPI rises slower than the 2% target, the BoC will lower its policy rate to lower interest rates throughout the economy. Lower interest rates facilitate borrowing and spending by Canadian consumers.
Higher levels of spending would increase the aggregate demand in the economy. More demand in the economy raises firms' pricing power and labour demand. Higher pricing power for firms translates into higher prices and inflation.
In Canada, the overnight market is the market for one-day repo trades. The overnight rate is strongly influenced (practically determined) by the BoC. BoC set its deposit rate equal to its target overnight rate. If an extra supply of money is about to push the overnight rate below the target, members of Payment Canada stop lending in the overnight market and deposit their extra cash with BoC. If the overnight rate rises significantly above the BoC target rate, the BoC will engage in reverse repo operations to bring the rate back to target. Thus, forward contracts on the Canadian Overnight Repo Rate Average (CORRA) are a good indicator of the market's expectation of future overnight rates.
Repo Trades
A repo trade, short for "repurchase agreement," is a form of short-term borrowing for dealers in government securities. In a repo, the dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. Here’s how it works:
- Initiation: One party (the borrower) sells securities to another party (the lender) with an agreement to repurchase the same or similar securities at a later date for a predetermined price.
- Collateralized Borrowing: The securities sold act as collateral, making the repo a secured loan. The difference between the sale price and the repurchase price represents the interest on the loan, known as the "repo rate."
- Maturity: Repos can have varying durations, from overnight (one-day repos) to term repos that last for weeks or even months.
- Reverse Repo: The opposite side of the repo transaction is known as a reverse repo. In this case, the lender (investor) buys the securities with the agreement to sell them back at a future date.
Benefits and Uses
- Liquidity Management: Financial institutions use repos to manage short-term liquidity needs.
- Interest Rate: Repos generally offer lower interest rates than unsecured loans due to the collateralized nature of the transaction.
- Market Function: Central banks use repos and reverse repos as tools for monetary policy to control money supply and influence interest rates.
Risks
- Counterparty Risk: The risk that the other party will default on the repurchase agreement.
- Collateral Value: The risk that the value of the collateral will decline, potentially leaving the lender exposed.
Example
- A bank needs short-term funds and enters into a repo agreement, selling $10 million in government bonds to another bank with a promise to repurchase them for $10.01 million the next day. The $0.01 million difference is the interest paid for the loan.
Repo trades are a crucial component of the financial system, providing liquidity and helping to stabilize money markets.
If CPI rises faster than the 2% target, the BoC would increase the overnight rate and thus increase various interest rates throughout the economy. Higher interest rates encourage saving and discourage borrowing. Higher savings and less borrowing result in a reduction of aggregate demand. Decreased demand for goods and services would reduce firm's pricing power and thus reduce inflation.
1 Month CDOR Forward Curve
As of May 29, 2023
To see how much change in the policy rate is priced by the fixed-income markets, we consider the 1-month CDOR forward curve. CDOR stands for Canadian dollars offered rate. CDOR is the rate charged by Canadian Banks to companies on short-term loans. CDOR is a benchmark compiled by Refinitiv Benchmarks Services (UK) Limited. It is determined from a survey of major banks. Forward CDOR prices are supplied by Chatham Financial.
Inflation and Interest Rates
As we see, forecasting interest rates hinges on predicting the path of inflation. To form an opinion about inflation, we may start by looking at the composition of the basket of goods and services, which is used to measure Canada’s CPI. CPI reflects changes in the price of a basket of goods and services which is representative of consumption by Canadian households.
Composition of Consumption in Canada: Goods vs. Services
The CPI basket comprises 51.1% services and 48.9% goods. CPI basket composition includes 14.4% durable goods, 7.1% semidurable goods and 27.4% nondurable goods.
Looking at CPI categories, we see that it mainly comprises 29.8% shelter, 15.9% food, 16.9% transportation (gasoline alone accounts for 4.3%), Household operations 14.5%, and Recreation and Education 9.3%. These five major categories comprise 86.4% of the CPI basket. The remaining 13.6% is mainly composed of 4.6% for Alcohol, tobacco and cannabis, 4.6% for health and 4.3% for clothing.
Main Categories of the CPI Basket
| Shelter | 29.8% |
| Transportation | 16.9% |
| Food | 15.9% |
| Household Operations | 14.5% |
| Recreation, education and reading | 9.3% |
| Alcoholic beverages, tobacco products and recreational cannabis | 4.6% |
| Health and personal care | 4.6% |
| Clothing and footwear | 4.3% |
When the pandemic started initially, uncertainty caused most economic actors to postpone their investment and purchase decisions. Subsequently, central banks brought interest rates close to their lower bound of zero, and governments began to hand out money generously. At the same time, people were told to avoid contacting each other. So consumers allocated large amounts of money to purchase goods. This would have limited consequences before the pandemic as factories had a sizeable spare capacity worldwide. But supply chains became clogged during the pandemic, and production was disrupted.
Thus in 2021, goods inflation picked up and caused CPI inflation to overtake the central banks' target. Unfortunately, central banks called inflation transitory and continued stimulating demand until early 2022, when the war started in Europe. War in Europe caused a jump in hydrocarbon prices and accelerated inflation.
Consequently, in spring 2022 Bank of Canada and the Federal Reserve began to raise their policy rate to dampen inflation. The BoC’s rate rises immediately raises the Prime Rate of Canada’s banks. As most lines of credit and HELOCs charge variable interest rates, changes to the BoC policy rate immediately increase interest payments by the borrowers. Also, interest and payment on adjustable-rate mortgages and variable-interest car loans immediately change after a change in the prime rate.
Long and Variable Lags
The effect of monetary policy famously has long and variable lags. The lag in the impact of monetary policy is, in large part, due to the nature of household debt. The amount of household debt in Canada has surpassed gross domestic product (GDP), but ¾ of household debt in Canada is mortgage debt. Most mortgages are either fixed or variable-rate mortgages. Fixed-rate mortgages are immune from the effect of changes in interest rates during their term, and variable-rate mortgage payments would not change unless their trigger rate is reached.
As rates rose and supply chains were declogging, inflation peaked in June 2022 at 8.1%. But in the meantime, all covid constraints were removed, and people who could not use many services during the pandemic tried to compensate by consuming more services. As goods inflation abated, service inflation accelerated, and service inflation was not transitory.
Will Mortgage Rates Go Down in 2024?
Yes, we have reason to believe that mortgage rates will decrease in 2024.
Over 2024, higher interest rates would reduce household spending and thus bring down the aggregate demand in the Canadian economy. Consequently, firms would lose part of their pricing power. This development is also likely to decrease job creation and consequently increase the unemployment rate.
When BoC is confident that inflation is approaching its target, it can focus on achieving maximum employment. At that time, BoC will start cutting its policy rate in stages to change its currently restrictive monetary policy to neutral. A neutral policy rate is a policy interest rate which does not slow down the economy, while it also would not cause economic activity to accelerate. A lower policy rate would directly lower variable rates by the same amount, but fixed rates will decrease to a lesser extent.