Interest rate & mortgage renewals Q3 2023
Note: This article was originally published in July 2023
While market conditions may have changed since then, the insights shared here reflect the mortgage trends, economic context, and buyer behavior of that period.
For current guidance or updated analysis, contact Cam directly at cam@clre.ca or check out our latest market insights.
Interest rate & mortgage renewals
Interest rates are the biggest point of discussion right now for homeowners and new buyers looking to enter in the housing market. The question on everyone's mind is "what is going to happen with interest rates?" " Will they keep rising, stay at this level or will there be cuts in the near future? "
The way homeowners should think about this question is not by asking "what's going to happen with rates" but instead "what risk do I want to accept?" On a variable rate, there is the risk that inflation has a resurgence and the BoC is forced to hike again. With a fixed mortgage there is cost certainty but you run the risk that rates do fall drastically and the payment becomes well above what a variable would cost you. The vast majority of renewals and new buyers are currently taking a short term fixed rate of 2-3 years. The interest rate market is currently expecting rates to be lower in 2-3 years from here, however, the opinion of the rate market has been very much at odds with the central banks many times over the past 18 months which just goes to show that the opinion of the market changes over time with different information.
The question "what's going to happen to short term interest rates?" is literally one of the most important questions in all of finance. Some of the smartest people in the world, managing trillions of dollars globally across currencies, equites and bonds are working constantly to figure out what's going to happen with rates and how to position accordingly. Knowledgeable real estate agents and mortgage brokers should be able to read the sign posts for what rate markets are showing at any given moment, but making educated guesses on what actually happens with rates in the future is the realm of economists, bond traders and other highly specialized experts in finance.
Looking at the historical chart below we can see that the variable has outperformed fixed over the past 25 years on an average of 1% but at some times as much as 2%. For the past year or so, the choice in terms of cost has been very clear. Fixed rate have been the cheaper choice, with the spread being 1% or more. But currently the difference between them has shrunk to a negligible difference. The 5 year variable rate (6.75%-6.85%) is about the roughly same as a 2 year fixed (6.79%) but slightly more than a 3 year (6.39%) This environment where both mortgages are on par with each other an unusual environment, however caution should be exercised that this is a signal to take a variable mortgage .
2022 was a good reminder to everyone that risk exists in the housing market, that returns are not guaranteed and the unexpected can happen. Interest rates are an incredibly complicated system with many highly complex variables. Despite signs that the economy is normalizing, the volatility from the past three years has still not settled and the future remain uncertain.
Our job as real estate experts is to help manage risk by keeping our clients informed with important information needed to make informed decisions. The decision on what is the right mortgage for our homes should be based on what's best for your family and not speculating on the path of future interest rates.
