Welcome to the final edition of our Mortgage Newsletter for 2024!
As the holiday season approaches, the Bank of Canada (BoC) delivered another surprise gift this morning—a 0.50% policy rate cut, lowering it from 3.75% to 3.25%. This marks the fifth consecutive rate reduction, bringing the Prime Rate down to 5.45%.
For homeowners with variable-rate mortgages or loans, this means additional monthly savings. Since June 2024, borrowers have seen cumulative monthly payment reductions of $145.83 per $100,000 of debt—a welcome relief before the year’s end.
Key Economic Updates Driving the Rate Cut
In Canada:
Inflation: October’s Consumer Price Index (CPI) rose to 2.0% YoY, hitting the Bank of Canada’s target but raising concerns about future tariff threats from the new U.S. administration.
Economic Growth: GDP growth remains sluggish, with only 0.1% growth in September and similar expectations for October.
Jobs Market: Despite economic stagnation, the job market added jobs in both October and November. However, unemployment rose to 6.8% in November from 6.5% in September—a multi-year high.
In the U.S.:
Unemployment: Re-tested August’s high of 4.2% in October.
Inflation & GDP: CPI rose to 2.7%, while Q3 GDP growth hit an estimated 2.8% (revised down from 3%). The anticipated U.S. tax cut stimulus could keep growth strong and inflation elevated, especially if proposed tariffs materialize.
Mortgage Market Insights
Bond Yields & Fixed Rates:
The bond yield-to-fixed-rate spread has returned to historical norms for insured and insurable mortgages. As more buyers re-enter the market, expect uninsured mortgage rates to follow soon.
Fixed vs. Variable Rates:
Current Gap: Fixed rates remain slightly cheaper than variable rates, but the gap has narrowed to just 0.25% after today's rate cut.
What to Watch: If this trend continues, we may see near-parity or an inversion by early 2025, just in time for the busy spring real estate market.
Variable Rate Discounts:
Variable-rate discounts are still modest but expect better deals if demand increases over the next 12-18 months.
What Should You Do?
1. Consider a 5-Year Variable-Rate Mortgage:
If your budget can handle some volatility, a variable-rate mortgage could be cost-effective for the next 3-5 years. You will need to be watchful though as assessment could change.
2. Plan for Your Mortgage Renewal:
If your renewal is coming up, waiting until March/April 2025 might be smart, especially for risk-tolerant borrowers.
Risk-averse borrowers: May consider a 3-5 year fixed term, especially if you expect market volatility next year.
3. Review Fixed-Rate Mortgage Options:
Read the Fine Print: Breaking a fixed-rate mortgage early could be expensive if rates drop unexpectedly. This is especially true for mortgages from the bigger banks
Consider a 3-year fixed mortgage, currently priced lower than 5-year terms.
4. Assess Your Current Fixed-Rate Mortgage:
If you’re locked into a fixed-rate mortgage with more than 2.5 years left and a rate above 5%, consider options to reduce your costs before Fixed Rates witness an increase.
Looking Ahead to 2025:
Markets currently expect another 0.75% drop in Prime Rate / Policy Rate in 2025—but this remains speculative, influenced by U.S. policy shifts and global economic dynamics. Stay tuned for what the new year will bring!
Fixed Rates (bond yields) are not expected to see much reduction, if any, from current levels.
Need personalized advice? Let’s review your unique situation and craft a mortgage strategy that works best for you.
Current Market Snapshot: 5-Year Bond Yields
As of today, the 5-year bond yield stands at 2.831%, slightly lower than the 2.92% reported on October 24, 2024. Following the U.S. Presidential election results on November 20, yields briefly surged to 3.32% before easing back to current levels.
Since peaking at 4.461% on October 2, 2023, yields have dropped by 163 basis points (bps). The lowest level in recent months was 2.642% on September 16, 2024, though we haven’t revisited that low since.
For those who enjoy diving into the numbers, we’ve included detailed charts below. These visuals help highlight key trends in 5-year mortgage rates, both fixed and variable. Think of them as your mortgage trend crystal ball—without the smoke and mysticism!
For those unfamiliar with terms like Insured, Insurable, Uninsured, or Rental, a concise explanation is provided in note# 1 below.
Note: The rates indicated below are the most commonly available rates for Prime borrowers. Many Qualified borrowers secure a lower interest rate than depicted below due to superior credentials. Interest rates with B-lenders and Private mortgages are at a premium to these levels.
The charts above show the trend in interest rate (see note#2) for Fixed Rate Mortgage types for the last 38 months. The rates have fallen by about 1.50% to 1.60% from their peak in October 2023. The rates have fallen by about 1.50% to 1.60% from their peak in October 2023. For the shorter term (1-3 year) Fixed rate mortgages, the premium over corresponding 5-year rates have continued to reduce (almost eliminated in the case of 3-year term).
Above chart shows the spread between the 5-year Canada Bond yield and 5-year Mortgage (Fixed rate). This spread appears to be stabilizing but appears to have settled down, unless we see very significant moves in bond yields in coming months.
The charts above show the trend in interest rate (see note#2) for Variable Rate mortgage types for the last 38 months. Do note the Variable Rate Pricing will adjust later today or tomorrow to reflect the change in Prime Rate. The speed of adjustment in Variable Rate is much slower than the Fixed Rates given the dependency with Bank of Canada’s decision schedule.
A higher discount on the chart generally signifies a heightened demand for Variable Rate mortgages. It reflects the dynamic interplay between borrower preferences and the response of lenders to this demand. Conversely, a lower discount may indicate a market shift towards Fixed Rate products.
We are most likely getting into a phase where more borrowers will opt for a Variable Rate mortgage given potential for reduction in Prime Rate and so the Discount to Prime Rate should be increasing in coming months.
Generally, Fixed rate mortgage rates are higher than their corresponding Variable Rate mortgages at the time of securing one but currently we are in a phase where the relationship is inverse. This typically happens when the interest rate trend is under reversal. There is no guideline as to how long such an inverse relationship can persist but in "normal" times this period is limited to couple of months at best. This inversion has persisted for over 24 months now but should revert back to normal as Bank of Canada continues to drop its Policy Rate. The premium should get eliminated by the 1st quarter in 2025 if we continue the current path of rate drops.
Note: If you need help with your financing options, are interested in working with me or want to learn more about my services, please don't hesitate to get in touch. I'd be happy to chat! Schedule meeting per your convenience here.
Thank you for staying with us throughout 2024! We wish you a joyful holiday season and a prosperous 2025!
1. Explanation of key terms
Insured – These mortgages are backed by a mortgage insurer like CMHC and borrower needs to pay an insurance premium. All properties purchased with less than 20% downpayment fall under this category and come with an amortization of 25 years or lower and purchase price cannot be higher than $1M.
Insurable – These mortgages require the borrower to have a downpayment of 20% or higher, amortization is restricted to 25 years or lower and purchase price cannot be higher than $1M.
Uninsured – These mortgages require the borrower to have a downpayment of 20% of higher but amortization can be 30 year or lower and purchase price can be higher than $1M.
Rental – These mortgages are specifically for Rental or Investment properties and need to have a downpayment of 20% or higher but come with amortization of 30 years (with most lenders) and purchase price can be higher than $1M.
2. Interest Rates depicted are those which are commonly accessible by most well-qualified borrowers with excellent credit and debt service ratios. Some borrowers might be able to secure an interest rate which is lower than these levels on account of superior qualification. Interest rates with B-lenders and Private mortgages are much higher than these levels.
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