It’s been a troublesome time for homeowners (and first-time buyers), however the Bank of Canada (BoC) has kept rates of interest regular since July 2023, and the newest economic data has experts suggesting rate cuts may very well be on the horizon. So what can Canadians expect from rates of interest in the approaching months and years, and what does that mean for fixed and variable mortgage rates? We spoke to an economist and a mortgage broker to get a greater sense of what is in store and whether a hard and fast or variable rate is your best choice in 2024.
What happened to rates of interest in 2022 and 2023?
Interest rates have risen significantly over the past two years, largely as a result of post-pandemic inflation.
“Central banks have had to respond very aggressively to the rise in inflation and have raised interest rates significantly since March 2022 – by 475 basis points,” says Robert Hogue, deputy chief economist at RBC Economics. (One basis point is one hundredth of a percentage point. And 475 basis points means 4.75 percent.) “This is by far the most aggressive monetary policy we have seen in at least a generation.”
John Andrew Newmana mortgage broker in Oakville, Ontario, points out that this aggressiveness was essentially a side effect of the economic impact of the COVID-19 pandemic. “The COVID environment drove all interest rates down because the government influenced the interest rate market in a way that was designed to help Canadians deal with the impact of the various lockdowns,” Newman explains. “They went extreme in a single respect, which caused inflation aspects to [COVID]after which rates of interest began rising.”
Interest rates rose rapidly to curb inflation, which had been high for many years. “There was almost a whiplash effect [after COVID] when interest rates went to the other extreme – and that’s where we are today,” says Newman.
Many mortgage holders who had fixed-rate mortgages before the pandemic are actually facing steep payment increases at renewal. Canadian mortgage holders with variable rates are also grappling with higher costs, although the impact has not been the identical for everybody – some have seen payments rise with each increase in the bottom rate, others haven’t.
With an adjustable-payment mortgage (sometimes called an adjustable-rate mortgage), mortgage payments fluctuate in response to changes within the lender’s prime rate. Borrowers with this sort of mortgage saw their payments increase when rates of interest began to rise.
However, many adjustable-rate mortgage holders have fixed-payment mortgages. When rates rose, their mortgage payments stayed the identical, but the quantity they paid every month decreased while the interest they paid increased. For a few of these borrowers, their repayments have stretched to the purpose where they’re paying almost nothing but interest, Newman says. Some have reached their trigger rate – the purpose at which mortgage payments not cover the mortgage interest cost.
This is one reason why it is important to know what kind of variable mortgage you have got – the primary can have a far greater impact in your budget and money flow within the short term, and the second can lead to a sudden increase when your mortgage renews. This increase could be difficult for a lot of mortgage holders, especially in the event that they’ve fallen into negative amortization (when monthly mortgage payments aren’t high enough to cover the interest owed on the loan).
