Why mortgage shoppers can expect brighter days ahead

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Despite an increasingly sketchy unemployment picture, the forecast is slowly getting brighter if you’re a borrower or home buyer.

Case in point: The Bank of Canada just gave mortgagors another housewarming present by way of its 25 basis point rate cut. Big banks then matched the move, lowering Canada’s benchmark prime rate to 6.70 per cent on Thursday.

This ‘gift’ will save Canada’s floating-rate borrowers roughly $15 to $21 a month per $100,000 borrowed, depending on their rate, amortization, whether it’s a new or existing loan and whether it’s a mortgage or interest-only home equity line of credit.

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With inflation also taking a dip, millions of Canadians suddenly find more wiggle room in their budgets. But the good news doesn’t end there. Expect three more treats for mortgage borrowers before the holiday lights go up in December.

Dual rate cuts in September

Officially, there’s just a 60 per cent chance of another Bank of Canada cut at the next meeting on September 4, according to the bond market. But I’m here to tell you the true odds are probably higher than that for six reasons:

1. The central bank tipped its hand Wednesday, telling us it’s worried about rates being too restrictive and that we “need growth to pick up.” Not cutting again in September would fly in the face of that mission.
2. Unemployment is accelerating, and historically, when it ramps up after the start of a rate-cut cycle, it keeps ramping up until enough rate cuts save jobs.
3. Mortgagors are still getting whacked with renewal rates up to 280 bps higher than what five-year borrowers signed up for in 2021, for example. That’s adding more and more drag to Canada’s economy each month.
4. Inflation could make further progress in the next August 20 CPI report, given slowing growth and statistical effects (a large July 2023 value is falling out of the year-over-year calculation). This could nudge Bank of Canada boss Tiff Macklem towards another cut.
5. Central bank surveys show that one-year inflation expectations are improving, and that mindset can be self-fulfilling.
6. For what it’s worth, history shows that back-to-back rate cuts are usually followed by a third cut.

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South of the 49th parallel, markets are pricing in an 86 per cent chance that the Fed starts its own rate-cutting campaign on September 18. (Note: This will change after Friday’s U.S. PCE inflation numbers.) That matters because U.S. bond yields usually fall before initial rate cuts — given that yields largely reflect the central bank outlook.

If U.S. rates drop, Canadian yields should fall in sympathy — to some degree. That’s potentially good news for Canadian fixed mortgage rates, which dance mainly to the bond market’s beat.

Lower qualifying rates

So far, the Bank of Canada’s monetary easing hasn’t increased purchasing power in Canada’s real estate market by much. The reason is simple: borrowers who need rock-bottom rates to pass the government’s mortgage stress test don’t choose variable mortgages.

Right now, to snag the most competitive nationally advertised conventional variable rate at 5.85 per cent, you need to demonstrate you can afford a 7.85 per cent interest rate. Folks with high debt-to-income ratios need an easier stress test. Hence, they opt for the cheapest fixed rates, which currently let you qualify at rates almost 100 bps lower than a variable.

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Meanwhile, the central bank has cut 50 bps in the last 50 days, but 5-year bond yields — which lead fixed mortgage rates — are only down half that. In other words, Bank of Canada cuts are boosting homebuyer purchasing power, but slowly.

The silver lining is that markets should continue pricing in lower central bank policy rates, assuming no new inflation scares. That should coax both bond yields and fixed mortgage rates lower.

A floor in home values

If refinancing high-interest debt is on your agenda, your ability to do that depends on your home equity. Homeowners’ best shot at increasing their equity hinges on lower rates bolstering housing demand. And that’s precisely what markets expect, with another 175 bps of Bank of Canada rate cuts projected over the next 26 months, according to forward rate data from CanDeal DNA.

Of course, none of this is good news for stymied homebuyers rooting for lower home prices to get their foot in the door. To those folks, you may be better off writing to the prime minister and immigration minister. Ask them why the welcome mat is out for so many newcomers when there aren’t enough homes to affordably house existing citizens.

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The Bank of Canada can only do so much. Its rate cuts have dual outcomes. They soften the mortgage stress test and encourage homebuilding, which improves housing affordability. They also support incomes and fuel home buying demand. That nibbles away at affordability — at least until housing supply catches up.

Ultimately, these nuances won’t stop the Bank of Canada from trimming rates as it wrestles inflation back to two per cent.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.

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The rates displayed below are updated by the end of each day and are sourced from the Canadian Mortgage Rate Survey produced by MortgageLogic.news. Postmedia and Imaginative. Online Inc., parent of MortgageLogic.news, are compensated by certain mortgage providers when you click on their links in the charts.

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