Why Mortgage Relief Is Looking Unlikely For Canadians In The Short Term

The Bank of Canada held the overnight lending rate at 5% at its October 25 meeting. Previously, the policy rate increased from 4.25% to 4.5% in January and was held at this rate until the decisions to increase the rate by 25 basis points consecutively in June and July.

Meanwhile, inflation increases have ebbed and flowed recently. Canada experienced a respite in inflation this spring, with increases in the consumer price index dropping from 3.4% in May to 2.8% in June, then increasing this summer to 3.3% in July and 4% in August before dropping down again to 3.8% in September.

So what does all this mean for mortgages? Let’s take a look at how these factors are impacting mortgage rates and when we might begin to see lower borrowing costs.

How Inflation And Interest Rates Are Impacting Mortgages

In response to the elevated policy rates designed to combat inflation, mortgage rates have increased substantially since spring 2022. Currently, discounted five-year fixed mortgage rates are lingering above 5%, a few percentage points higher than the rates observed just two years ago. This shift has had a notable impact on real estate affordability.

The surge in mortgage interest costs played a pivotal role in July’s boost in inflation, contributing a substantial 30.6% year-over-year gain and emerging as the primary driver of headline inflation. To provide perspective, the all-items inflation rate, excluding the impact of mortgage rates, stood at just 2.4% that month.

It should be noted that while the overnight rate stands at 5%, the federal government in Q2 saw its largest net debt issuance in two years. The government’s deficit spending has a stimulating impact on the economy, offsetting the effect of rising interest rates on the consumer price index.

Inflationary pressures persist, significantly influencing the trajectory of mortgage rates. Although September’s inflation numbers came in at 3.8%, lower than August’s, it is still higher than the Bank of Canada’s desired target.

At GreenFlow Financial, we are witnessing some of our clients feeling the effects of the rate increases. Of those who have variable-rate mortgages, some have seen their payments increase by as much as 60%. Those with fixed-rate mortgages that are now up for renewal are also looking at large increases in payments. Per the Bank of Canada Financial System Review 2023, borrowers with five-year, fixed-rate mortgages maturing in 2025 and 2026 could see payments increase by 20%-25% at renewal.

The commercial property industry is also facing the heat of rising costs. The monthly commercial rents services price index (CRSPI) measuring the change in lease rates of commercial building space in Canada increased from 106.9 in January to 107.6 in June.

Mortgage Rate Relief Looking Unlikely In The Short Term

The question remains whether the Bank of Canada will continue to maintain the policy rate or consider an increase to further combat inflation. Experts predict that a rate reduction is unlikely until 2024, considering the core causes of inflation remain unresolved.

For instance, reverse globalization, driven by tensions between Western countries and nations such as China and Russia, is anticipated to continue exerting an inflationary force. Most recently, the developing conflict in the Middle East, an area of the world that plays an important role in the supply of energy, has the potential to result in increased oil prices and a recession, especially if other countries join the war. Additionally, the shift toward more sustainable energy sources will require substantial investments in energy infrastructure, potentially influencing real interest rates through the end of 2024.

Mortgage rates may remain high in direct correlation to the policy rate. If the Bank of Canada continues its pause or opts for further rate increases, mortgage rates are expected to stay high. Elevated interest and mortgage rates in 2023 compared to the Covid era may become the new standard for some time. Ultimately, the possibility of lower mortgage rates for Canadians hinges on the direction of policy rates and how the economy continues to adapt to monetary and fiscal policies. Policymakers will likely stand ready to implement changes to the policy interest rate if necessary.