This Page's Content Was Last Updated: January 19, 2024

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- Mortgage rates reached a 15-year high during October - November 2023.
- As of January 2024, mortgage rates have started to decline, which is expected to continue to the end of 2025.

See 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 |
---|---|---|---|---|---|---|---|

2024-02-24 | 5% | 7.2% | 5.9% | 6.29% | 5.79% | 4.84% | 4.69% |

2024-12-31 | 4.25% | 6.45% | 5.15% | 5.77% | 5.25% | 4.64% | 4.5% |

2025-06-30 | 3.75% | 5.95% | 4.65% | 5.46% | 5.03% | 4.49% | 4.44% |

2025-12-31 | 3.25% | 5.45% | 4.15% | 5.29% | 4.91% | 4.42% | 4.42% |

This table is populated based on the forward short-term lending rates on February 22, 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. |

Lock these mortgage rates until July 3, 2024

(130 days - Longest lock period among Big 5 Banks)

1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 4-Year Fixed | 5-Year Fixed | 5-Year Variable | |
---|---|---|---|---|---|---|

6.74% | 6.16% | 5.41% | 5.41% | 5.16% | 6.67% |

Term | Rate |
---|---|

1-Year Fixed | 6.74% |

2-Year Fixed | 6.16% |

3-Year Fixed | 5.41% |

4-Year Fixed | 5.41% |

5-Year Fixed | 5.16% |

5-Year Variable | 6.67% |

Lock these mortgage rates until July 3, 2024 (130 days)

5-Year Fixed | 5-Year Variable | |
---|---|---|

5.16% | 6.67% |

5-Year Fixed | 5-Year Variable |
---|---|

5.16% | 6.67% |

Lock these mortgage rates until June 23, 2024 (120 days)

1-Year Fixed | 2-Year Fixed | 3-Year Fixed | 4-Year Fixed | 5-Year Fixed | 5-Year Variable |
---|---|---|---|---|---|

6.29% | 5.79% | 4.84% | 4.94% | 4.69% | 5.9% |

Term | Rate |
---|---|

1-Year Fixed | 6.29% |

2-Year Fixed | 5.79% |

3-Year Fixed | 4.84% |

4-Year Fixed | 4.94% |

5-Year Fixed | 4.69% |

5-Year Variable | 5.9% |

Canada’s annual inflation has fluctuated between 2.8% and 4% over the past eight months. The downward trend, which brought the inflation down from 8.1% in June 2022, is stalled. Yet market participants and the Bank of Canada (BoC) think past rises in the target overnight rate, quantitative tightening and untangling supply chains are affecting the balance of supply and demand. Without any unforeseen development, the BoC will likely start lowering its policy rate over the next few months to prevent it from becoming overly restrictive.

The BoC continues to consider the neutral policy rate (the overnight rate that facilitates stable economic activity without causing either an economic slowdown or acceleration) to be approximately 2.5%. This estimation consists of 2% inflation and 0.5% of real interest rate. There are good reasons to believe that the neutral rate is slowly increasing. These factors include changing demographics, climate change and a slow turn from globalization to localization.

As of January 10, 2024, we have an overnight rate of 5% and an inflation rate of 3.1%. So, the real overnight rate is 1.9%, which is likely restrictive. However, different levels of government have increased debt by $30 billion over the past year (of available data). The government’s deficit spending has a stimulatory effect on the economy and slows the impact of restrictive interest rates on the rise of CPI.

Since March 2021, Canada’s inflation has been well above the BoC's target of 2%. Given that inflation has been over target for nearly three years, there is a danger that inflationary expectations might become unanchored. This lengthy period of above-target inflation suggests that the Bank of Canada should be slow and deliberate in lowering its policy rate.

Yet the effect of higher interest rates is working its way through the economy as people continue to renew their mortgages. BoC is trying to balance the risks of over-tightening vs. the risk of under-tightening by keeping the rates steady while continuing with quantitative tightening.

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.

For many Canadians, mortgage payments are the most significant expense, as ¾ of household debt in Canada is mortgage debt. Using WOWA's mortgage calculator, we see that with a 25-year amortization and a mortgage rate of 6.5%, you will pay as much interest as your initial principal. If your mortgage rate is reduced to 3.5%, you will pay half the money you initially borrowed in interest over a 25-year amortization period. With a mortgage rate of 2.4%, interest would total one-third of your initial mortgage principal.

Mortgage Interest Rate | Interest Portion | Principal Portion |
---|---|---|

6.5% | 50% | 50% |

3.5% | 33% | 67% |

2.4% | 25% | 75% |

The mortgage is assumed to be amortized over 25 years and at no cost other than interest.

Thus, mortgage interest on its own is a high cost for many Canadians, and therefore, choices like having a fixed rate or a variable rate mortgage and the term of one’s mortgage contract are consequential. The most conservative option would be a fixed-rate mortgage with a longer mortgage term. For example, a 10-year fixed rate mortgage or a7-year fixed rate mortgage. 10-year and 7-year fixed mortgages are conservative because they shield you from any increase in (mortgage) interest rates for a relatively long period of time.

By graphing interest rate vs. term, you derive what is known as a yield curve. Above, you see the yield curve of Canada's lowest fixed mortgage rates. 8-year and 9-year mortgages are uncommon in Canada. 6-year term mortgages are also uncommon, such that only six lenders advertise them. Thus, we should look at the mortgage yield curve excluding those three terms.

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

Jan 10, 2024 | Government of Canada Bond | 4.79% | 4.18% | 3.8% | 3.33% | 3.24% | 3.23% |

Best Mortgage Rate | 6.19% | 5.94% | 5.04% | 4.79% | 5.75% | 5.84% | |

Spread (Risk Premium) | 1.4% | 1.76% | 1.24% | 1.46% | 2.51% | 2.61% | |

Jun 7, 2023 | Government of Canada Bond | 5.12% | 4.60% | 4.18% | 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. The extent of lender competition depends on their perceived risk at the time. Based on the table above, see that the spread between the risk-free and mortgage rates was under 1% for the most competitive mortgage terms in summer 2023. While it is just under 1.5% early in 2024. This change suggests that banks are perceiving heightened macroeconomic risk. They have significantly increased their provision for credit losses over the last quarter for the same reason. We should also note that three-year mortgages followed by one-year mortgages have been the most competitive 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 use Government of Canada (GoC) bond yields as of June 6 2023, to predict GoC bond yields in the middle of 2024, 2025 and 2026.

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% |

A variable mortgage is composed of the lender's prime rate minus a spread. As the prime rate moves up or down, the variable mortgage rate moves in lock step with the prime rate. The prime rate itself often moves in lockstep with the overnight rate. So to know how the variable mortgage rate changes in Canada, you need to think about how the overnight rate will change.

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.