Mortgage Rate Outlook


The Canadian mortgage market is undergoing significant tightening with the availability of credit falling and interest rates rising. The mortgage stress test introduced in January negatively impacted home sales nationwide as prospective homebuyers with more than 20 per cent down payments were denied access to loans they would have qualified for under the old regulatory regime. As a result, mortgage credit growth in Canada has slowed dramatically. On the pricing side, monetary policy continues to be the primary driver of higher mortgage rates in 2018 as the Bank of Canada embarks on its first tightening cycle since 2004. Although the 5-year qualifying rate was fairly steady over the third quarter, as the Bank continues to tighten, mortgage rates will almost certainly follow. When the Bank of Canada adjusts its overnight rate, it influences borrowing rates throughout the economy. However, monetary policy is just one factor affecting 5-year borrowing rates and so, unlike variable rates, not only do
fixed rates not correspond one-for-one with the overnight rate, they can sometimes differ in direction as well. Looking at past tightening cycles reveals that the behaviourĀ of mortgage rates can sometimes be very different than what the central bank is targeting. For example, in the late
1990s, markets were anticipating a weakening economy, causing 5-year bond yields to stay flat and mortgage rates to decline despite the Bank raising rates by 275 basis points. Conversely, from 2004 to 2007, tightening by the Bank of Canada had a more conventional impact on long-term borrowing rates. In fact, mortgage rates rose by considerably more than its benchmark, the 5-year bond yield, due to heightened credit risk in the period leading up to the 2007 financial crisis. Since the Bank embarked
on its most recent tightening cycle in 2017, rates across the economy have risen almost in unison, which suggests that financial markets and policymakers share similar views on the Canadian economic outlook. As the Bank of Canada continues to tighten rates over the next two years, both
the 5-year fixed qualifying rate and the 5-year discounted rate are forecast to reach 5.85 per cent and 3.95 per cent respectively in 2019.


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