The question that many have on their minds is how much higher will rates go. Fixed mortgage rates have increased by roughly 3.00% since the September 2021 while the prime rate has increased by 1.25%.

It’s no big secret that the Bank of Canada is not finished with their rate increases which will continue on July 13th. 

But will fixed rates continue to rise as well?

Let’s first discuss what we can expect to happen with prime rate, then we’ll follow with what we can expect from fixed mortgage rates.

 

The US Influence On Canadian Rate Increases

On June 15, the US Federal Reserve increased their rate by 0.75%, which was the largest increase since 1994. Even before the US made this radical move, there were rumblings that the Bank of Canada could increase their rate by as much as 0.75% with their next scheduled rate announcement on July 13th. Canada tends to follow the US, which could mean that we’ll see a 0.75% increase on that date.

But will they follow the US this time around? 

The Bank of Canada has already increased their rate by 1.25% since March. The US on the other hand has increased by 1.50%. 

Even if Canada were to stick with an increase of 0.50% as originally predicted, this would still put their key policy rate 0.25% ahead of the US. If they went ahead with the 0.75% increase, then they would be ahead by 0.50%. 

So which country’s central bank is the one blazing the trail?

The inflation problem persists and radical measures are required to bring it under control. But will the Bank of Canada move this far ahead of the US? They will almost certainly increase by at least 0.50% on July 13th.  We’ll have to wait until then to find out if the take it one step further and pull the trigger on the 0.75% increase.

 

How Much Higher Will Prime Rate Go?

The Bank of Canada is expected to increase by another 1.50% over the next year (including the expected increase on July 13th).  There has been some speculation that it could increase by another 2.00% at the peak. Should this happen then the prime rate would be 5.70%.

 

How Much Higher Will Fixed Mortgage Rates Go?

Fixed rate increases have largely outpaced recent prime rate movement. This is a clear indication that the Bank of Canada rate increases do not have a direct influence on fixed mortgage rates. For example, if the Bank of Canada increases their rate by 0.75%, this does not mean that fixed mortgage rates will increase by the same margin.

Fixed rates are largely determined by bond yields which move autonomously from the Bank of Canada rate. However, this doesn’t mean that the BOC has no influence on bond yields. It can, which would then influence fixed mortgage rates. Let me explain further as I get that this can sound confusing.

As the prime rate is expected to increase by another 1.50% to 2.00% over the next year, the bond market is already prepared for it. This means that further increases from the Bank of Canada should not drive bond yields up further than where they are today. If the BOC were to come through with a larger than expected increase of say 1.00%, then this would shock the bond market which would drive them up further.  Just as if they were to come through with a smaller increase than expected, the yields can then be expected to fall.

This should mean that the spread between fixed and variable should start to shrink over the next year. In other words, fixed rates should level off while the Bank of Canada continues to increase their rate. But what should happen does not always come to fruition.

 

Spread Between Fixed and Variable

The spread between fixed and variable is roughly 1.64% to 2.25% for most situations. If the Bank of Canada increases their rate by another 1.50% over the next year as predicted, today’s variable rates would still be lower than today’s 5 year fixed rate alternatives.

If they are more aggressive and increase by another 2.00%, then today’s variable rate would move higher than the current fixed rate in some situations, while it would remain lower for others. Even if it were to move higher, this doesn’t mean that you should have taken fixed. It just means that you’re now starting to give back some of your savings.

If you’re uncertain on whether you should be choosing a fixed or variable rate, then I would highly recommend reading the following of my recent blogs:

 Are You Worried About Rising Mortgage Rates? 

How Many Rate Hikes Will It Take To Lose With a Variable Rate? 

Are Fixed Mortgage Rates Now The Way To Go? 

Should You Convert Your Variable Rate Into A Fixed? 

 

Downward Pressure On Fixed Rates?

Fixed mortgage rates are largely influenced by bond yields. As the yields have been trending down since mid-June, upward fixed rate pressure has been relieved. If the trend continues, then it’s possible that we could see some reductions to fixed mortgage rates. However, I would not expect anything substantial.

While it’s possible that fixed rates may have levelled off, they have not been this high since 2007/2008. The market 5 year fixed rates are around 5.24%, with the lowest discounted rates ranging from 4.19% to 4.89%, depending on your situation.

Market variable rates are roughly prime -0.35% (currently 3.35%) with the lowest discounted rates ranging from prime -1.15% (currently 2.55%) to prime -0.65% (currently 3.05%).  

Mortgage rates can vary depending on a number of factors:

  • Purchase price / Home value
  • Down payment / equity percentage
  • Purchase date
  • Type of transaction (purchase, refinance, etc)
  • Property usage, etc.

 

I would recommend checking out my blog on Why Different People Are Quoted Different Rates for more information on the reasoning.

Our specialty is sourcing out the lowest mortgage rates on the market which is something we are very serious about. We’ll do the mortgage rate shopping for you! To find out the lowest mortgage rate available for your situation, please email us at pmteam@citycan.com or you can give us a call at 647-368-5009.

 

Conclusion

While fixed mortgage rates have now reached a 14 year high, it’s expected that they will start to drop at some point in 2024. As with anything finance related, there are no guarantees and anything can happen. Unexpected events can arise which can radically change current predictions. No one expected the Russia’s invasion of Ukraine and its negative impact on the supply chain, which has fueled inflation. The pandemic was another big one that radically changed previous market predictions. 

No one has a crystal ball, and anything can happen.

 

Please leave any questions or comments below!