Mortgage Rates in Canada in 2022
Mortgage decisions in 2022 will be heavily influenced by mortgage rate forecasts. This is a long-term choice that might save homeowners hundreds of dollars in mortgage interest.
Based on recent economic data, years of in-depth mortgage market research, and hundreds of mortgage files, this article will forecast future mortgage rates.
Here are the primary predictions:
- Mortgage rates in Canada are expected to stay historically low for the next 5 years.
- The central bank is expected to raise mortgage interest rates by 1.25 percent in 2022, according to market consensus.
- Interest rates are likely to rise by 0.75 percent in 2022, with a 1% increase possible depending on how the economy performs.
One of the finest views we have available to anticipate mortgage rates is history.
During the 2008 crisis, the banking sector and economy as a whole required unprecedented bailouts and stimulus. Thankfully, the stimulus worked, and the economy recovered. However, from 2008 to 2019, the GDP grew at a relatively slow or flat rate, while interest rates remained low.
With Covid, we will see another major economic rescue around 2020-2022. As we near economic recovery, there is increased inflation owing to a temporary closure of the economy and supply chains.
More on this inflationary gap later. The essential issue is that adding large additional government and corporate debt to existing massive debt may prolong reliance on ever more cheap debt to fuel the economy. It can cause long-term economic stagnation and a ‘magnifying impact’ of higher rates. When debt levels were a fraction of current levels, a 0.25 percent rise had a significantly greater impact. As a result, low rates are under considerable pressure.
The market expects the Bank of Canada to raise mortgage rates by 1.25 percent in 2022.
The fundamental instrument for reading the current mortgage rate market is the GCS Yield. A Canadian bond is a type of government debt security that provides a return. The yield is one of the safest investments since the Government would have to go bankrupt to not pay its investors.
To calculate the 5-year Canadian Government Bond Yield, every piece of available economic data is included in. Simply put, when the market expects the Bank of Canada to raise rates, the Bond Yield rises. Bond yields fall when the bond market expects the Fed to lower rates. In other words, the bond yield trades or is valued based on the Canadian Central Bank’s rate movements. The Bank of Canada sets interest rates based on the state of the economy.
The Canadian Bonds are currently valued for a 1.25 percent rate hike in 2022. However, the Bond yield has fallen from a peak of 1.51 percent in October 2021. This yield may fluctuate in early 2022 based on many economic factors.
This is why mortgage interest rates are expected to rise just 0.75 percent in 2022, with a 1 percent increase possible depending on how the economy performs.
While daily monitoring the bond yield is one of the best practices for predicting when 5 year fixed rate price is recommended, it is not the only perspective to consider.
The Bond Yield represents market consensus and is significantly connected with fixed-rate mortgage movements (it gives us a few days lead), but the consensus is continually shifting. Markets are being influenced by economic headwinds and tailwinds, so rates will likely remain somewhat lower than anticipated.
Slowing inflation, rising stocks.
Inflation continues to be driven by supply chain difficulties. Even while employment salaries are rising on their own, this is not the major reason of greater inflation. Because of this, the major source of inflation is expected to decline.
Lumber and, to a lesser extent, gas/energy costs are declining. But there is evidence of a declining tendency and a reversal of the price increasing trend.
Inventories are also starting to recover in some of the most impacted industries, such as automakers and semiconductor makers. This is a counter-inflationary supply-side indicator.
The ‘Prices Paid Trend indicator’ is an economic indicator that normally precedes the CPI by 2-3 months. This statistic is going downward, indicating a decreased Consumer Price Index (the major measure of economic pricing/inflation). While this indicator is anticipated to rise in December 2021, the overall trend is negative.
In January 2022, it looks that COVID lockdowns will resume in Canada. These lockdowns may be temporary, but they may not. In any case, this will have a negative economic impact, supporting lower interest rates. A slower-growing economy equals lower rates. Given that we are currently in the midst of a pandemic, let alone suffering its economic impacts, the Bank of Canada will be cautious about raising rates.
Finally, the Bank of Canada expects inflation to fall in 2022. So far, the Central Bank believes inflation will gradually return close to 2% by the second half of 2022. Given the Bank’s stance, bond rates should be lower than they are now.
A 5 year fixed rate mortgage is the greatest method to take advantage of the reduced rate and decrease risk if you choose a variable rate mortgage.
Assume the monthly payment on a 5 year fixed rate mortgage is $2000 and a variable rate mortgage is $1750. Using mortgage prepayment, you may raise your monthly variable rate mortgage payment to $2000. That means you are paying an extra $250 per month on your mortgage when rates are low.
So long as your regular variable rate payment is less than your fixed-rate payment, you are saving money on your mortgage. Then, after 2 years, when your variable rate is equal to your fixed rate, you can elect to eliminate the prepayments if you want the increased cash flow.
The primary concept is that you saved money by using the cheaper variable rate. Now, beyond breaking even with a fixed rate, your variable rate must continue to rise until you’ve ‘repaid’ all the savings you made during the first portion of your term. For example, if you saved $5,000 in the first half of your term, rates must rise to the point where you overspend by $5,000 vs a fixed rate. While a 1.25-1.50 percent increase in rates by the end of 2023 is plausible, it is less probable that additional increases would occur.
At this stage in early 2022, a more than 1.50 percent rate rises looks unlikely in the next 5 years.
Overall, the 2022–2023 playbook is more difficult to forecast owing to Covid-19. However, if we take a cautious approach, slowing economic growth and increasing total debt while upgrading supply chains, we expect rates to remain low, maybe even lower than currently factored into fixed-rate mortgages.