This Page's Content Was Last Updated: July 4, 2023

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- Currently, we face the highest mortgage rates of the past 15 years.
- Variable rate mortgage rates are expected to decline by as much as 1.5% by the end of 2025.
- Medium-term (5-year) mortgage rates are expected to decline by 0.8% until the end of 2025.

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 |
---|---|---|---|---|---|---|---|

2025-06-30 | 4% | 6.2% | 4.9% | 5.47% | 5.11% | 4.7% | 4.78% |

2025-12-31 | 3.75% | 5.95% | 4.65% | 5.2% | 4.9% | 4.57% | 4.73% |

This table is populated based on the information available on September 17, 2023. Use the most updated data to form your judgment for your financial decisions. 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. |

Mortgage rates are a type of interest rate (lending rate) . Lending rates determine the amount of interest that should be paid on a loan as a percentage of the borrowed amount. An interest rate is composed of a risk-free rate and a risk premium. The risk-free rate is the time value of money, while the risk premium compensates the lender for the possibility that the loan might not be paid back in full or on time.

Different risk levels justify different interest rates on different loan products. In general unsecured loans are riskier compared with secured loans. More specifically, we can approximately order the risk of different loans as follows: Payday loan > Credit card > Personal loans and Personal lines of credit > Car loans > HELOCs > Mortgages. The risk premium and, thus, the interest rate on loans obey the same order.

When we concentrate on a specific lending product (with a particular level of risk), risk premium can be assumed to stay the same, and most changes in interest rates are likely due to changes in the risk-free rate.

In countries with a stable political system and responsible government, lending to the government is considered free of risk. Therefore, we can use the yield on Government of Canada bonds as a risk-free rate.

1 Year | 2 Year | 3 Year | 5 Year | 7 Year | 10 Year | |
---|---|---|---|---|---|---|

Government of Canada Bond | 5.12% | 4.60% | - | 3.73% | 3.50% | 3.44% |

Best Mortgage Rate | 5.90% | 5.50% | 4.90% | 4.70% | 4.80% | 5.30% |

Spread (Risk Premium) | 0.78% | 0.90% | 0.72% | 0.97% | 1.30% | 1.86% |

We see that the spread between the lowest mortgage rates and the risk-free rate depends on the level of competition between lenders. Based on the table above, we can assume that the spread between the risk-free and mortgage rates is 1% for the most competitive mortgage terms. Note that the lowest advertised rate might be for a specific region (province) and apply only to a specific category of mortgages (often insured mortgages).

We expect inflation and economic growth to decline over the next few quarters and reduce the risk-free rate. The risk-free rate is expected to decline in line with inflation, as the risk-free rate is composed of the expected inflation plus the real interest rate. It is impossible to predict the exact amount of decline in bond yields, but the best indicator of their future path is the expectation of the financial market participants.

The price of securities reflects the money-weighted average expectation of market participants. We would expect the following future contracts to be useful in deducing market expectations of future Canadian bond yields.

- CGZ – Two-Year Government of Canada Bond Futures
- CGF – Five-Year Government of Canada Bond Futures
- CGB – Ten-Year Government of Canada Bond Futures
- LGB – 30-Year Government of Canada Bond Futures

These contracts trade on the Montreal Exchange and are available with expiry in June, September, December and March. At each time, there are four contracts available for trade. This means that these contracts should provide information on market expectations about Canadian interest rates one year into the future. Unfortunately, liquidity is mostly limited to the contract expiring between half a month and five months ahead. Thus these contracts are not useful for gauging expectations for rates in the next couple of years.

Another option for measuring expectations of future bond yields is combining yields on longer-term bonds with yields on shorter-term bonds. More specifically, an investor should be indifferent to whether they can earn a specific income from a bond that lasts for (x+y) years or earn the same income by investing in an x-year bond followed by reinvesting their money at year x in a y-year bond.

For example, an investor might invest in 10-year bonds, or they might invest in 5-year bonds followed by investing in 5-year bonds in 5 years. We use an investment calculator to see that investing $1,000 in 10-year GoC bonds at their current yield with semiannual compounding would produce $1,406.46 after ten years.

After five years, investing $1000 in 5-year GoC bonds at their current yield with semiannual compounding would produce $1,202.96. The difference of $1,406.46 - $1,202.96 = $203.5. Once again, we use an investment calculator to find the required rate of return for an investment of $1,202.96 to turn into $1,406.46 over five years with semiannual compounding. We would require a rate of return of 3.14%. So the bond market must expect a 3.14% 5-year yield in 5 years.

Using the same reasoning, we can compile the following table

Bond Term | Yield | Return By Maturity |
---|---|---|

10 Year | 3.44% | $1,406.46 |

7 Year | 3.5% | $1,274.92 |

5 Year | 3.73% | $1,202.96 |

4 Year | 4.00% | $1,171.66 |

3 Year | 4.18% | $1,132.14 |

2 Year | 4.60% | $1,095.22 |

1 Year | 5.12% | $1,051.86 |

Bond Term | Expected Yield |
---|---|

1 Year | 4.08% |

2 Year | 3.71% |

3 Year | 3.63% |

4 Year | 3.38% |

5 Year | 3.23% |

Term in Years | Expected Yield |
---|---|

1 | 3.34% |

2 | 3.40% |

3 | 3.15% |

5 | 3.06% |

Term in Years | Expected Yield |
---|---|

1 | 3.46% |

2 | 3.06% |

4 | 2.99% |

7 | 3.12% |

We expect the BoC policy rate to likely reach a peak of 5% in 2023. As the economy slows down late in 2023 and in 2024, the policy rate is expected to come down to 4.25% by the end of 2024 and by another 1% in 2025. The prime rate is expected to come down in lock steps with the policy rate and bring down variable mortgage rates with itself.

The calculators and content on this page are provided for general information purposes only. WOWA does not guarantee the accuracy of information shown and is not responsible for any consequences of the use of the calculator.