Implications for Homebuyers February 3, 2025
Canadian mortgage rates have plummeted to near 3-year lows in response to the U.S. imposing tariffs on Canadian goods. The Bank of Canada is expected to "lean toward providing support to the economy," by delivering additional rate cuts throughout the year. BMO sees a quarter-point rate cut at each of the Bank's meetings this year until October, while National Bank says there are grounds for an "emergency" inter-meeting rate cut.
Implications for Mortgage Rates As bond yields drop, fixed mortgage rates also drop. This is because mortgage lenders typically price their fixed mortgage rates similarly to government bond yields to remain competitive and offer attractive returns to investors who purchase their mortgage-backed securities. The 5-year government bond yield is one of the most closely watched indicators for setting fixed mortgage rates.
Other Factors Affecting Mortgage Rates In addition to bond yields, other factors that can affect mortgage rates include:
The state of the economy: A strong economy can lead to higher demand for credit, which can push interest rates up. Conversely, a weak economy can lead to lower demand for credit, which can push interest rates down.
The Bank of Canada's monetary policy: The Bank of Canada can influence interest rates by raising or lowering its policy rate.
The supply and demand of credit: If there is a high demand for credit relative to the supply, interest rates are likely to be higher. Conversely, if there is a low demand for credit relative to the supply, interest rates are likely to be lower.
The creditworthiness of the borrower: Borrowers with good credit scores are typically offered lower interest rates than borrowers with poor credit scores.
Benefits of Fixed-Rate Mortgages Fixed-rate mortgages offer the following benefits:
Certainty: Fixed-rate mortgages provide borrowers with certainty about their monthly mortgage payments. This can help borrowers to budget and plan for their finances.
Protection from rising interest rates: If interest rates rise, borrowers with fixed-rate mortgages will not see their monthly payments increase.
Peace of mind: Knowing that your monthly mortgage payment will not change can provide peace of mind.
Risks of Fixed-Rate Mortgages Fixed-rate mortgages also have some risks, including:
You may miss out on lower interest rates: If interest rates fall after you lock in a fixed-rate mortgage, you will not be able to take advantage of the lower rates.
You may have to pay prepayment penalties: If you break your fixed-rate mortgage early, you may have to pay prepayment penalties.
Your payments may be higher than variable-rate mortgages: Fixed-rate mortgages often have higher initial interest rates than variable-rate mortgages.
Conclusion Canadian mortgage rates have recently fallen to near 3-year lows in response to the U.S. imposing tariffs on Canadian goods. This is good news for homebuyers who are looking to lock in a low interest rate. However, it is important to be aware of the risks of fixed-rate mortgages before making a decision.
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