What's going on with mortgage rates in 2024?

Dan Eisner's Rate Prediction

After enduring hauntingly high interest and mortgage rates — they're finally creeping back down the wall.

Even after the BoC's recent 'monster' rate cut, borrowing costs remain unsettlingly high, straining household budgets, cooling housing markets, and dampening consumer spending and business confidence.

We're seeing an economic cooldown amid a state of excess supply, with more being produced than consumed. As restrictive interest rates work their black magic up through months of lagging indicators, this imbalance could further erode Canada's economic growth.

That's not good news — though a silver lining news could be faster (and deeper) prime rate cuts from the BoC.

However, the recent U.S. election results (a repeat Trump presidency) may cast some shade onto Canada's rate agenda.

If U.S. growth in 2025 surpasses expectations, trade tariffs on Canadian imports are imposed, and inflation increases, there are potentially significant economic repercussions for Canada that may impact our (rate) way forward (I explain further below).

The weakening economic factors playing into this rate-cut cycle.

Canada's headline inflation rate came in below 'target' in September. Much sooner than anticipated.

Inflation cooled to 1.6% in September from August's 2.0% — a huge factor in the BoC's bigger rate cut.

This latest favourable headline inflation reading is thanks to base-year effects for gas (the price increase for this CPI component was much higher last year, which makes this September's increase look lower in comparison). The items excluding gas rose about the same as last month, with groceries still logging a faster pace than the headline at 2.4%.

Keep in mind that just because Canada's pace of average price increases has fallen below the BoC's target, that doesn't mean things are suddenly cheaper for Canadians. According to Stats Canada:

• Compared to last September 2021, the CPI rose 12.7%
• Rent today is +21.0% costlier nationally
• Food purchased from stores is +20.7% more expensive, increasing substantially during this same 3-year period

There's now a line drawn in the pumpkin patch: Cooling interest rates could help give households some needed relief when looking over bills at the kitchen table (as long as the inflation rate continues to behave).

And, the BoC's just-released consumer and business surveys show inflation expectations are continuing to improve, adding more fuel to its rate-cutting rationale.

Weakening Canadian labour market.

The October unemployment rate remains unchanged from last month at 6.5%, but the underlying numbers don't exude 'stability.'

With a gain of 15K jobs (less than the 27K expected), the total jobs created didn't (once again) match up to the continued brisk pace of Canadian population growth and growing labour force, with an employment rate that's been on a downward trend since February 2023.

Wage inflation also gained 0.3%, going from last month's 4.6% to October's 4.9%. This upside surprise is sure to bug inflation watchers, but as a lagging indicator, is unlikely to sway the BoC from its current rate-decline mood.

Economic growth is projected to underwhelm.

Despite a slight uptick in Q2, GDP (Gross Domestic Product) forecasts for the rest of 2024 look a little scarier, keeping to the long shadow cast by rapidly higher rates. The Bank of Canada has revised its Q3 prediction downward to 1.5%, but the reality is still expected to undershoot that figure.

The BoC stakes its 2025 growth projection at 2.1%; economists expect a much lower print of around 1.5%.

Canada's per capita GDP also fell again for the 5th straight quarter in 2024 — already far below our economic potential, considering the population increases our nation has seen in the last couple of years.

Canadian housing markets.

So far, nationally, housing markets have had a zombie-like response to the first few rate cuts, keeping home prices relatively stable for now. Sudden housing fervour could add to the shelter cost inflation basket and work against the rate cuts to halt or pause them.

Will new mortgage rules recently dropped by the federal government spur more housing activity this year or into 2025?

The potential for economic jump-scares is never completely out of sight:

• If Canada's rate agenda diverges by more than 1.0% from the U.S. Federal Reserve, it could impact our dollar for an inflationary effect
• Oil prices cracking the $100 ceiling due to global conflict or increased demand would raise business input costs that could be passed on to consumers (currently, oil prices are nowhere near that height)
• Impacted supply chains due to global conflict, weather events, labour strikes, or trade wars could result in higher input costs passed onto consumer prices

U.S. economy and rate-cut pace.

Like it or not, our countries' economies are closely linked, including the impact of the two rate agendas on the Canadian dollar.

With an incoming Trump presidency, some experts caution that U.S. economic growth may rev up, and 'immigration and tariff proposals' and implied tax cuts could result in supply or demand shocks that increase U.S. (and Canadian) inflation once again.

(U.S. economic growth could also have a positive effect on Canadian growth, but higher inflation would complicate things.)

The U.S. Fed has a dual mandate of maintaining lower inflation and a strong job market (vs. the BoC's sole 'inflation' mandate) — if it's forced to hold off on further rate cuts for a time, it could open up a more significant rate spread between the countries for a negative and inflationary effect here and on the CDN dollar.

Just because the economy is humming in the U.S. doesn't mean we'll do the same here, especially if tariffs (duties imposed on imported or exported goods) of 10-20% are introduced. Canada does about 75% of its export business with the U.S., and interruptions and higher prices could significantly slow growth.

That means the Bank of Canada may have to weigh combating higher inflation vs. sparking the economy when deciding on rate cuts in 2025 and beyond.

Despite the abovementioned concerns, the previous Trump presidency valued lower interest rates and inflation — so time will tell how the transition will shake out for Canadians at the kitchen table.

What will happen at the next rate meeting on December 11?

With one double-cut slipped under the door, some experts are calling for another one at the last BoC meeting of 2024.

I'm not ready to go beyond another 0.25% cut for that decision. Rates need to come down, but going too fast risks flaring inflation once again — especially with new U.S.-related concerns on the economic horizon.

(We've seen a quadruple hike of 1.0% in Canada during the past two years, though that sizable jump down is less likely to happen.)

Where will rates go in 2025?

I predict another 1.25% in BoC rate cuts coming by the end of 2025.

Assuming inflation continues to toe the line, BoC rate drops of at least 0.25% per meeting will likely resume through Q1 of 2025 (at least).

For months, I held a forecast of Canadian prime rates falling from peak by about 1.5% into the first quarter of next year and continuing to fall another 0.50% — for a 2.0% drop in total (to a 3.0% BoC resting rate).

I recently revised that forecast for a resting BoC rate of 2.50% for a total prime rate drop of 2.5% by the end of 2025, and I'll hold it there until we see how markets (and nerves) settle from the recent U.S. election news.

The neutral rate?

Many economists currently gauge the BoC neutral rate to be around 2.75% (where the economy is neither stimulated nor repressed), and rates might need to go lower to stimulate an economy dragged down by an intense hike schedule over two years.

Is there a danger that the prime rate could increase, despite talk of more cuts?

There's always that danger, though the widespread economic softening already underfoot makes it unlikely for at least the next few months as rate cuts work their way through the economy.

A year from now, we hope to have much lower rates and wonder where the economy will go from there.

What can affect BoC's rate decisions?

Our central bank wants to see cooling numbers all around to continue its rate drop cycle:

• Stone cold? (Inflation) – September's headline annual inflation rate was down 'past' the BoC's target to 1.6% (from 2.0% last month); core inflation (median and trim average) was unchanged from August at 2.4% (next reading Nov 19)
  
  
• Cooling (Jobs) – Canada's October labour market was little changed: the unemployment rate was flat at 6.5% but a gain of +15K jobs (down from September's +47K jobs created) wasn't enough to overcome continued population growth and wider deterioration seen (next reading Dec 6)
  
  
• Warming (Wages) – October's average wage growth surprised to the upside with an increase to 4.9% from September's 4.6%, triggering a nervous tick in those watching inflationary factors (next reading Dec 6)
  
  
• Lukewarm to the touch (Economic growth) – August's GDP reads essentially unchanged, following a 0.1% increase in July, and September is looking to track a 0.3% rise; Q2 GDP surprised higher at 2.1%, but Q3 results are forecast to come in lower than the BoC's revised forecast of 1.5% (down from a prediction of 2.8%) (Sep and Q3 reading on Nov 29)
  
  
• Warm-ish (Bond yield market) – Canadian 5-year bond yields are hovering around 3.1% after recent strength in U.S. labour numbers, a rise in their October inflation rate, and U.S. Federal Reserve comments that it doesn't need to hurry to cut interest rates

Are fixed rates coming down?

Fixed mortgage rates are steered by the Canadian bond market and (eventually) follow the movements in bond yields up or down. 5-year bond yields are the standard for setting 5-year fixed rates and are the reference in this section and blog.

They'll likely hold for a bit.

Canada's 5-year bond yields are hovering around 3.1%. All eyes are on the U.S. economy and the market reaction resulting from the Nov. 5 election — with a string of recent factors pointing towards a floor under bond yields (and fixed mortgage rates), such as strength in U.S. labour numbers, a rise in their October inflation rate, and U.S. Federal Reserve comments that it doesn't need to hurry to cut interest rates.

(Before the U.S. election, bond yields had already decreased ahead of projected 2024 policy and prime rate changes in both countries.)

With a repeat Trump presidency announcement comes apprehension on this side of the border over proposed tariffs of 10-20% (duties on importing and exporting goods), which may considerably impact Canadian economic growth and higher inflation, with over 75% of our exports going to the U.S.

It's early 'post-U.S.-election' days, so we wait and watch for the potential impact on bond yields and fixed mortgage rates — but fixed rates aren't likely to decline substantially in the next while.

If yields jump up, look for a (delayed) fixed rate increase. Lenders are closely watching their costs and retaining capital to deal with the potential for increasing debt arrears.

Is there room for fixed rates to fall as the prime rate drops?

Fixed rates have made their main declines, and the recent U.S. market activity may keep them held to a tight range for a while longer, especially if rate agendas are clouded with uncertainty as we move through a U.S. government transition.

If markets calm down, there may be room for a 0.25% fixed-rate decline over time if the BoC policy rate comes in below the neutral rate (currently thought to be a policy rate of around 2.75%) by the end of 2025.

Variable rates (that float with changes to bank prime rates) have more room for decline than fixed rates. They're still currently higher than the stalwart 5-year rate, which isn't normal. Usually, variable rates are lower than fixed at a spread of about 0.25% to 1.0% due to the increased risk of change.

We may see the best 5-year fixed rates stabilize into the high 3's as prime rates make their way down to a more typical spread relationship.

Get a rate hold now!

If you're considering buying a home or renewing sometime in the next few months, talk to one of our expert brokers about getting a rate hold. It could protect you from rate volatility, and you'll still get a lower rate if it goes down during your hold.

Can the U.S. economy affect rate hikes here?

The U.S. economic landscape was finally relenting to the pressures of higher rates, with declining inflation and a more downtrodden jobs market than they've seen in months. But recent numbers have improved and a double-rate cut is thought to already be spurring activity.

A U.S. government transition has thrown some uncertainty into how both economies will fair as we go.

Why do we care? Economic conditions south of the border can pile on factors weighed by our central bank (and drive higher prices here) to affect its rate decisions.

Will Canada see a recession?

Despite the constant, distant calls of the 'recession' loon, it hasn't flown into our backyard quite yet. That doesn't mean the trajectory for a soft landing — meaning no recession or a very mild one — is an absolute. Nothing is ever certain in love or economics.

Back in October 2023, the Bank of Canada referred to projected economic faring as 'low positive growth' that will walk the line and possibly dip into negative territory (but not as a full-blown 'recession'). So far, that's coming true, with a 2024 GDP that's skimming above the line.

There's optimism that market resilience might keep our economy out of recessionary territory. Experts had projected a mild recession through the first half of 2024, which did not materialize. However, sustaining these higher rates for too long may jeopardize the soft landing.

Our labour market is showing wider signs of system stress, as fewer companies plan to hire, and more may commence layoffs to shore up expenses.

A recession would bring mortgage rates down faster.

If economic weakening accelerates beyond expectations, the BoC would drop prime rates faster, providing more budget relief when we'll likely need it most.

Stagflation isn't expected to stick a landing.

Stagflation, a period of high inflation coupled with a weak economy and high unemployment, is on everyone's radar. According to the BoC, "it's not where we are now" as our inflation isn't high enough, having come down to around 3% from over 8%, and with a (still) relatively low unemployment rate.

Mortgage rule changes in 2024 will offer more help to home buyers and owners.

Along with an anticipated period of declining interest rates, a spate of new mortgage rules should help improve affordability for some home buyers and enable more homeowners to save on their mortgage renewals:

Starting December 15, 2024:

• An increase in the home-price cap from $1M to $1.5M for insured mortgages (for primary and secondary home purchases, not investor purchases) will allow less than a 20% down payment in more expensive markets.
• First-time and all new-build buyers can extend an insured mortgage to 30 years from the standard 25-year amortization, which will help lower mortgage payments and improve stress-test qualification.
  

• For uninsured mortgage switches at renewal, OSFI's federally-required mortgage stress is no longer required, allowing more homeowners to find a better deal.

Starting January 15, 202

• Eligible homeowners will be able to access an insured refinance for up to 90% of their 'improved property' value (capped at a $2M home value) for construction funds, and extend to a 30-year amortization.

Does True North anticipate an increase in mortgage activity?

The higher rate environment has dampened affordability. Even though many Canadian home buyers and owners are holding off on plans to buy or move, some are finding deals to get ahead of a potential housing market rush as prime rates ease off and variable rate discounts grow.

As always, we offer great rates and specials, and we're attracting many mortgagees who look to lower their monthly costs while taking advantage of housing deals in their area.

Predictions are mixed about the effect lowering rates will have on housing prices. More sellers are listing to get out of restrictive rates, yet markets can still drum up more demand due to the highest immigration numbers Canada has seen in years.

Rates and home prices are elevated enough for some to consider delaying their buying intentions until next year when the mortgage stress test will be even lower (as the prime rate lowers over the coming months).

Depending on your details and needs, our low short-term fixed Rate Relief™ product can help you bridge the gap with budget relief now, enabling your dream home purchase sooner, with the hope of renewing into lowered market rates.

Read more here about how high mortgage rates may impact the 2024 housing market.

My mortgage advice for 2024?

Shop for your best rate — and consider a variable one.

Around 2M Canadians are coming up for renewal within the next couple of years. Even if rates continue to go down in 2024, homeowners will still take a budget hit by renewing into higher rates.

The most important thing you can do in this market is shop around for your best rate and product. Many Canadians are still very unaware that they don't have to stick to their bank for a mortgage.

We exist to do the comparing on behalf of our clients, checking with several accredited and alternative lenders for the best solution and budget fit for their needs, while passing along a volume rate discount. We're fast, we speak several languages, and we're very good at what we do — which is why we have so many 5-star reviews.

First-time home buyers especially need expert advice to set them on a path to successful homeownership amid these price pressures.

Which rate should you choose? Variable rates are trending down and can offer instant budget savings at each rate cut versus locking into a 5-year fixed rate and watching rates drop from the sidelines. You can always lock into a shorter fixed rate if you get too nervous.

Owning a home is a tremendous source of pride in Canada. I created True North to provide clients with a better mortgage experience and save them thousands with their best rate and mortgage choice.

Have questions about your mortgage or pre-approval? Give us a shout, anywhere you are in Canada. We have your best rate, expert advice and unbeatable service — with over 15,000 5-star reviews from our happy clients.