For the last six months, we’ve been watching fixed mortgage rates climb like a stubborn cat up a tree. Just when was looking like this would never end, we’re now starting to see some relief.  As of late last week, we’ve seen multiple lenders dropping their fixed rates by as much as 0.25%.

But is this the start of the big mortgage rate drop we have all been waiting for?

Or is this just a temporary blip as we saw back in March? 

 

Is this the Big Mortgage Rate Drop?

Bond yields had been on a relentless march upward, but the trend took a U-turn on October 18th, taking a steep dive of roughly 14%. As fixed mortgage rates are heavily priced off bond yields, the tumble is pushing them downwards. Some lenders have since come through with multiple rate drops over that period.

But will it continue?

It’s still too soon to determine if rates will continue to drop or if this is a temporary dip. In March of this year, we saw fixed rates nosedive by roughly 0.50% following the collapse of Silicon Valley Bank. It rattled the financial industry which resulted in the bond market plummeting like my willpower at a chocolate buffet. Some economists began to forecast that the Bank of Canada would cut their rate by late spring/early summer. But once it was determined that the sky wasn’t falling, those forecasts were pushed out and bond yields began to rise once again…bringing fixed mortgage rates with them. 

But the recent downward trend in bond yields is not due to a shocking piece of news as it was in March. It’s purely due to signs of a dwindling economy, which is needed to bring inflation in check. As long as the economy continues to weaken, then it’s likely that fixed mortgage rates will continue to fall. 

Unemployment rose to a 21 month high in October, which was the fourth increase in the past six months as reported by Statistics Canada. This is clear evidence that the economy is losing steam, which is exactly what is needed to bring inflation under control. And inflation needs to be brought under control before we start seeing any significant drops to mortgage rates.

While the Bank of Canada won’t cut their rate until it’s 100% certain that inflation is no longer a problem, the bond market will react based on news and market sentiment. In other words, fixed rates can be expected to fall ahead of the Bank of Canada rate.

 

What’s Next from the Bank of Canada?

While the Bank has stated that they are prepared to increase their rate further if needed, it’s widely expected that their next move will be a cut. Four of the big six banks are predicting that the BoC will start to cut its rate as early as the 2nd quarter in 2024. It was previously only RBC who was expecting the cuts to start in the 3rd quarter, but BMO has recently pushed their prediction from the 2nd quarter to the 3rd.

While the forecasts for the rate cuts have been pushed out on multiple occasions, we’re getting closer to when they are expected to start. The 2nd quarter of 2024 begins in less than five months. But it still remains to be seen as to the cuts will begin that soon.

As for the Bank of Canada themselves?  They have repeatedly stated that they are not prepared to cut their rate until it’s clear that they will reach their inflation goal of 2%. They expect this to happen in late 2025, which would imply that they are not planning to cut before that time. They have to be careful with their words, as if they sound too optimistic, the bond market would likely react, which would drive fixed rates down sooner. This would then drive housing demand, which would give inflation a boost that the Bank of Canada does not want to see.

 

Conclusion

While things are looking promising for mortgage rates, we’re not quite singing with the birds just yet. The financial world can be unpredictable at times, which became very clear to those in variable rate mortgages over the past 18 months. But if we keep hearing positive news on inflation, then there is a good chance that the downward trend in fixed mortgage rates will continue. This will eventually follow with a cut from the Bank of Canada, and that’s when we’ll be busting out the confetti!

But as always… time will tell and anything can happen.