This year, mortgage interest rates will be a big topic in the Canadian real estate market. After the standard five-year fixed-rate mortgage stayed above six percent for four months in a row, many things have happened with interest rates. These changes could help future homebuyers save some money.
What the Federal Reserve Means for Canada
When the Federal Reserve announced three rate cuts for 2024 in December, Canadian investors quickly turned their attention to the Bank of Canada (BoC) to see what they would do this year. However, many economists and market experts say not to just follow what the U.S. central bank is doing because the BoC has its own plans.
The futures market is very excited about the chances of early rate cuts by the Canadian central bank. Traders think the BoC might start changing rates as early as spring, especially since the economy is slowing down. But since inflation is still above the BoC’s target of two percent, some experts believe the summer might be the earliest time for cuts.
How Are Bond Yields and Mortgage Rates Related?
Growing expectations for the BoC to lower interest rates have affected government bond yields. As of January 11, the main five- and ten-year yields dropped to 3.31 percent and 3.23 percent, respectively. The rise in bond yields and the wild changes seen since fall have calmed down.
But what does this mean for mortgage interest rates? There is a strong link between bond yields and mortgage rates. When bond yields drop, mortgage rates usually go down too, and when they go up, mortgage rates tend to rise. The BoC’s policy rate also impacts government bonds, which can affect mortgage rates.
Predictions for Mortgage Interest Rates in 2024
By the end of the year, the five biggest banks in Canada believe the BoC’s policy rate will be between 3.50 percent (CIBC and TD) and four percent (BMO, RBC, and Scotiabank). BoC Governor Tiff Macklem and his team have warned that they might raise rates if inflation goes up.
Currently, Canada’s annual inflation rate is 3.1 percent, and the core consumer price index (CPI), which does not include food and energy prices, is below three percent. Economists say that the BoC might start reducing its tightening measures if the economy slows down. Last year, Canada’s economy hardly grew, often showing a zero percent growth rate. Housing experts also say that the real estate market has slowed a bit because of the tightening measures.
Nevertheless, economists expect that a five-year fixed-rate mortgage will be between four and five percent by the end of 2024. Some mortgage lenders are already offering rates below five percent, but some experts say it is too soon to celebrate because inflation might rise again.
Understanding Inflation’s Impact
In the U.S., the annual inflation rate went up to 3.4 percent in December, which was higher than expected, up from 3.1 percent. A similar situation could occur in Canada, possibly leading to higher bond yields, interest rates, and mortgage rates.
Should You Wait to Buy a Home?
Experts predict that real estate prices in Canada will rise slowly in 2024, regardless of whether interest rates go up or down. However, they warn homebuyers not to try to guess the best time to buy if they plan to purchase a home this year. It is better to focus on finding a property that meets your needs rather than worrying about changing rates.
In summary, the Canadian mortgage market is set to change in 2024. By keeping an eye on inflation and bond yields, potential homebuyers can make informed decisions about when to buy.