Update as of 05/10/17: Since we wrote this, mortgage rates have gone even lower. The article has been amended to reflect the lower rates.
We’re in the thick of the spring homebuying season and contrary to warnings just a few months ago, mortgage rates in Canada have actually been trending downward the past few months.
Yes, you read that right.
On our site, we just saw the lowest five-year variable rate ever on offer (or, at least, the lowest since we launched the company in 2012).
Sigma Mortgage is currently offering a five-year, closed variable rate for 1.69% in Ontario.
Seeing mortgage rates this low is surprising. After all, only a few months ago, mortgage rates were creeping higher. We received plenty of warnings about the need for homebuyers to lock in rates because costs were about to rise.
So what’s going on?
Last year's rise in borrowing costs was short-lived
Following the U.S. elections in November, there was an immediate increase in borrowing costs for financial institutions. Bond markets down south started pricing in higher inflation — another way of saying rising prices. All of this was based on sound reasoning. The newly-elected American president, Donald Trump, had put forward a proposed budget that was high on spending and big on tax cuts. This was meant to aggressively drive up demand in the American economy — and cause prices to rise.
Anytime inflation rears its head, a country’s central bank is forced to take action. It must raise interest rates. That makes borrowing money more expensive, cooling demand and easing the pressure on prices.
Of course, bond markets will move ahead of any increase in interest rates. That’s what happened immediately following the election. But in the months since, yields have come back down, making borrowing costs more affordable. Inflation expectations have significantly cooled since November.
So much for higher mortgage rates.
Brokers getting more competitive
Canada’s governments have revved up regulation in the mortgage market recently. From taxing foreign buyers in Vancouver to stress testing borrowers at the bank, it’s clear that governments are concerned about what’s going on in the homebuyer market.
And for good reason. There have been a lot of shady accusations in cities like Vancouver and Toronto. Condo flipping in Toronto, shadow buying in B.C. — hot housing markets usually come with some troubling behaviour, and sometimes governments need to step in.
But increased regulation also means that brokers have to sweeten the deal to keep potential homebuyers from walking away.
That’s why mortgage rates have been steadily getting lower as brokers continue to entice Canadians to buy homes despite the slew of new housing rules.
The Bank of Canada has little justification to raise rates
There was some pressure earlier this year on Canada’s central bank to raise interest rates, especially given the escalation in house prices in Toronto in the past 12 months.
But the BoC has its hands tied. Sure, the Canadian economy has been strong recently — so strong, in fact, that we’re on pace to record annualized growth of 4% in the first quarter. That’d be the best performance in years.
But on the other, the current strength is too recent to justify raising rates. Regional economies such as Alberta are still suffering the fallout from low oil prices. That means low interest rates are needed to encourage consumers and businesses to keep spending money.
At any rate, there’s little chance the bank will move on rates this year. There’s too much risk of doing more harm than good. And if we see a rate hike next year — when many economists are forecasting one — it’s likely to be the start of a slow and gradual period of rate hikes.
That means brokers have time on their hands. We’re still a long way from higher rates.
And so, despite fears, brokers keep offering lower rates. Which vindicates anyone who’s opted for a variable-rate mortgage in the past year.