Rates are back in flux this summer - here’s everything you need to know.
Summer is (almost) officially here and most of us want to be focused on the sunshine and not more shifts in mortgage rates - but alas, the market has other plans!
Fixed rates are on the rise again, and after a quick moment of reprieve, we’re back to waiting to see what the Bank of Canada does next. But don’t panic - instead, let’s jump into exactly what is happening out there and how to set yourself up for success no matter what this summer brings.
The summer rate landscape is shifting again
Since the early pandemic days shifted our comfortable reality, the real estate and mortgage roller coaster has had all of us holding on for dear life. A couple of short years ago, buyers enjoyed those sub-2% 5-year fixed rates and a benchmark rate of just 0.25%. Since then, there have been eight consecutive rate increases from our friends at the Bank of Canada, a 20% drop in home prices, and many buyers have been forced to pause their home ownership dreams thanks to qualifying rates of over 7%.
Then as little as two weeks ago, we were living it up with inflation slowing down quickly, fixed rates decreasing and hope that the Bank of Canada could send us some relief as soon as the end of the year. But after April’s numbers proved that inflation might be more stubborn than anticipated, we’re back on that uphill climb. So what does this all mean for your summer purchase or refinancing plans? Let’s start with a quick refresher on which mystical forces create this rate environment, anyway.
What’s the Bank of Canada up to?
As a quick refresher, the Bank of Canada’s (BoC) overnight rate is the benchmark interest rate set by the governing body that banks and lenders use as a guidepost for their prime rates. It’s also one of the only tools that the BoC has to target inflation by making it more expensive to borrow money and, in an ideal world, slowing consumer behaviour.
This is why BoC kicked off a cycle of 8 consecutive rate hikes starting last March to battle inflation, which was at a record high of over 8%. With each hike, more homeowners in variable rates were walloped with ballooning mortgage payments, and the narrative shifted to doom and gloom. But this March, when inflation was heading in the right direction, and the BoC announced a pause, we breathed a sigh of relief.
But now that inflation has seemingly stalled out above 4% and the US federal reserve is discussing further rate hikes as well, there is a real possibility that the Bank of Canada may follow suit and hit us with another hike this summer. Our team has been getting asked a lot about our predictions for the June 8th rate announcement, and the truth is that it’s anyone’s guess now. April’s inflation numbers proved that the market is still robust and may require an extra push (which the BoC has been clear that it won’t shy away from), but softening month-to-month GDP coupled with public pressure to avoid recessionary fallout could make them extend the pause yet again.
Weren’t fixed rates just going down?
Various factors influence fixed mortgage rates, but the one we watch most closely is the government bond yield of the same length (5-year bonds for 5-year rates, 3-year bonds for 3-year rates etc.). When a bond's yield increases, we can typically expect that the fixed rate of the same length is sure to follow, and vice versa. Because government bonds are a safe investment, investors usually sell off their bonds to purchase higher-risk, higher potential yield investments when the market is strong. This drop in demand decreases the yield as the value of the bond drops. When the market outlook is less than stellar, on the other hand, investors will flock back and purchase bonds to shelter their cash and weather any potential storm. When this happens - you guessed it - increased demand drives the price up, and the yield shoots up.
Things were looking great earlier this spring! Inflation was heading quickly in the right direction, prompting investors to sell their bonds and drawing fixed rates down. More buyers were coming off the sidelines, warming the market, and pushing prices up for the first time in about a year. But those pesky inflation numbers caused investors to head for the hills and back to their trusty bonds, pricing in more potential rate hikes and, as a result, a potentially harder landing than we’d expected.
So are the lower rates we saw last week gone for good now? Much like with the overnight rate, there is no way to know for sure. Keeping a keen eye on the BoC’s June 8th announcement, the US Federal Reserve’s next meeting on June 13-14 and May inflation numbers (released June 27th) will tell us more!
Preparing for the ups and downs
So since it’s pretty clear that, despite our best efforts, we can’t predict what will happen next, what is the best thing you can do as a current homeowner or prospective buyer this summer? First, get a rate hold locked in sooner than later. Whether you are considering a new purchase this summer or have a refinance in mind ahead of an upcoming renewal, the best thing you can do for yourself right now is to get the process started. Once pre-approved, we can lock in today’s posted rate for you for up to 120 days. If rates continue to trend upward, you can move forward with peace of mind! And if rates come back down? No stress! We can re-price your file and get you the lower rate when it comes time to purchase. There is no downside to completing a rate hold, but many potential downsides to missing the opportunity.
Second, consider a shorter fixed-rate term. We are completing a lot of refinances for homeowners this spring - some to access equity while prices are up and rates are down to consolidate high-interest debts or invest in renovations and others to get ahead of upcoming renewals. And while the 5-year fixed rate mortgage has historically been the most common by a landslide, interest in 1-4 year terms has nearly doubled this spring. Why? Because a shorter term allows you the reliability of a consistent payment while also allowing you to take advantage of potential rate decreases sooner without incurring early prepayment penalties. Shorter-term fixed rates tend to be a bit higher than their longer counterparts, but the potential benefit of being let out of your contract earlier can outweigh that by a landslide.
Finally, start the conversation. If you are considering a purchase, have a renewal on the horizon or are feeling bogged down under consumer debt, it is never too early to start a conversation with a mortgage professional, regardless of the rate environment. But while we are on this roller coaster, feeling supported in your financial decisions is more important than ever. There are tools at our disposal to help ease your mind and your monthly financial burden, but we can’t help until we connect!
Head to the link below to schedule a chat, or reach out any time with questions about your mortgage, purchase, or what is happening in those markets!
