The Bank of Canada has kept its overnight lending rate target at its effective lower bound of 0.25 percent for more than a year to support the country’s economic recovery during the COVID-19 pandemic.
Now, as the country enters its second year of the pandemic, the Bank appears unlikely to change its tune anytime soon.
The Bank announced on March 10 that it would keep the overnight rate at 0.25 percent, possibly until 2023, during a regularly scheduled announcement. Furthermore, since August 2020, the conventional five-year mortgage rate has remained unchanged at 4.79 percent.
James Laird, co-founder of Ratehub.ca and President of CanWise Financial, explains the latest news on the Canadian mortgage market and how it may affect consumers in 2021.
What the latest Bank of Canada rate announcement means
In the mortgage industry, the Bank’s decision to keep the overnight rate at 0.25 percent was not unexpected, according to Laird. What’s more important, he says, is the Fed’s reaffirmation of its commitment to keep rates unchanged for another two years.
“That was notable because there was a lot of good news in the beginning of the year,” Laird explained.
Despite some positive developments in early 2021, such as the ongoing vaccine rollout and gradual economic recovery, Laird claims that unemployment in certain industries remains high. Many part-time and hourly workers in the hospitality, tourism, and retail industries were laid off as a result of the pandemic. Before changing rates, the Bank, according to Laird, will want to see the situation significantly improve.
“They pointed to that in the last announcement and said, ‘You know what? Even if there is good news on many fronts, we will continue to monitor this factor before changing our stance of keeping rates low until 2023,’” Laird said. “That will be something to keep an eye on.”
Despite the fact that mortgage rates have been and will likely remain low for some time, Laird explains that this is not the primary driving force behind Canada’s burgeoning real estate market. Instead, he attributes it to the pandemic’s influence on lifestyle changes. Many of us have reconsidered our living arrangements, especially those who now work from home, according to Laird, and this has prompted people to purchase a home that is better suited to their current needs.
“No one says, ‘I wasn’t planning on buying a house, but now that rates are low, I’m going to buy one.’ “It’s never happened before,” Laird said. “It’s other lifestyle factors that make you want to buy a new house or make changes to the one you have. Rates are only one factor in the equation.”
While the overnight rate that influences the mortgage market is expected to remain unchanged for the time being, fixed-rate and variable-rate mortgages have been gradually diverging in the first months of 2021. The overnight rate has a greater impact on variable rates because banks use it as a benchmark to determine their own prime rate, which is used to create variable mortgage rate offerings. Variable rates have remained virtually unchanged as a result of this. Fixed-rate mortgages, on the other hand, have been rising in price, prompting Laird to say that demand for variable-rate mortgages has increased.
“Now that fixed rates have risen a little, we are seeing more demand on the variable side,” Laird explained, “because the spread between variable and fixed rates is wider than it was before because variable rates haven’t changed at all.” “Fixed rates are still the most popular, but compared to a month ago, more people are opting for variable [rates].”
If you’re a new or current mortgage holder
Given the unusual economic conditions, the process of selecting a variable or fixed-rate mortgage may seem more daunting to prospective homebuyers. The decision to go with a fixed or variable rate, according to Laird, should be influenced by the holder’s own personal circumstances and strategies.
“There will never be a time when we recommend that everyone take fixed or variable. It all depends on the consumers’ situation, their household, and the type of people they are,” Laird explained.
Consumers who are more risk averse may want to opt for a fixed-rate mortgage rather than a variable-rate mortgage, according to Laird. If you have the financial flexibility to manage a variable rate if it rises, and you don’t mind a little risk, a variable rate could be a good fit for you.
Existing mortgage holders may be enticed to break their terms in order to chase a lower rate and save money for other projects if ultra-low mortgage rates become available. When it comes to fixed-rate mortgages, however, Laird points out that there are usually not many savings to be had because the penalty for breaking the mortgage could be equal to the savings—the lower the current market rates are, the higher the penalties for breaking the mortgage can be, he says. The proper steps in determining the best course of action are to obtain a mortgage penalty quote from your provider and then speak with your mortgage broker to work out the math.
“If you’re nearing the end of your term, it can make sense,” says Laird, “especially if you think rates will be higher by the time your renewal comes up.”
What’s on the horizon for mortgage rates in 2021
In terms of the future, Laird says it’s difficult to predict when the real estate market will cool down. Demand for Canadian housing has been rapidly increasing since mid-2020, and Laird expects this trend to continue throughout the spring market.
Variable rates are expected to stay the same in 2021, according to Laird, while fixed rates are expected to rise moderately. This year, he explains, optimism about vaccine distribution, unemployment levels, and a return to normalcy will play a role in rate forecasting.
“If you believe those things will happen, you should expect fixed rates to rise higher. If you’re pessimistic, you shouldn’t expect fixed rates to rise significantly,” Laird said. “We’re all individuals, and we each decide on our own rate strategy. That’s exactly what we discuss with our clients.”