If you’re planning to buy a home in 2021, you’re planning to refinance your mortgage or your mortgage is coming up for renewal, you’re probably curious where mortgage rates are heading. Can we expect the same record low mortgage rates we saw throughout 2020 or will mortgage rates finally start to trend upward? Read on to find out.
Variable Rate
Real estate agent with house model and keys
If you have a variable rate mortgage, you can breath a sigh of relief. Variable mortgage rates aren’t expected to go anywhere in 2021. That’s because we’re still dealing with the aftermath of the COVID-19 pandemic.
Pricing of variable rate mortgages is based on prime rate. Each individual mortgage lender sets its own prime rate, however, prime rate is the same at almost every lender across the board (except TD Bank, which sets its own “mortgage prime rate”). Changes in a lender’s prime rate is based on changes by the Bank of Canada in its overnight lending rate. This is the rate that banks borrow and lend overnight funds among themselves.
The Bank of Canada was quite aggressive in its cutting of interest rates when the severity of the COVID-19 pandemic was first realized. In March 2020, the Bank of Canada cut interest rates on three separate occasions. One scheduled and two unscheduled. We even got an interest rate cut on a Friday afternoon – wow!
The Bank of Canada’s overnight lending rate currently sits at 0.25 percent. Usually, the Bank of Canada cuts rates by 0.25 percent. There was speculation that our central bank could do a “micro cut” of less than 0.25 similar to the Bank of England and the Bank of Australia, but that doesn’t look like that’s going to happen.
Originally the Bank of Canada said it wasn’t going to raise rates until at least 2023. A lot depends on how quickly the Canadian economy recovers from COVID-19. If the COVID-19 variants push back the date life can return to normal in Canada, it’s quite possible that the our central bank could keep rates low even longer, which would mean low variable rates for the years to come.
There is however a wild card. If inflation continues to be strong and Canada continues to post better than expected GDP growth figures, might we see variable rate mortgage rise sooner than anticipated? Only time will tell.
Fixed Rate
If you want the certainty of knowing exactly what your mortgage rate and payment will be, it’s hard to beat the certainty of a fixed rate mortgage. Right now you an lock in to a fixed rate mortgage when rates are at a record low.
Rates are at a record low due to the ongoing COVID-19 pandemic. Rates fell throughout 2020, flatlining over the last few months. Canadians have become accustomed to five-year fixed mortgage below two percent, which was unheard of until 2020. So what does the future hold?
Fixed mortgage rates are priced based on government of Canada bond yields. And since we’re so closely linked to the U.S., government of Canada bond yields are heavily influenced by U.S. government bond yields.
Government of Canada bond yields have been relatively flat for the past several months. However, this has changed recently. Government of Canada bond yields are at their highest level since April 2020. We have already seen some mortgage lenders raise their mortgage rates. Although the rate increases haven’t been much, if this trend continue we could find ourselves in a rise interest rate environment.
If you’re thinking of buying a home, now would be a time to reach out to your mortgage broker and secure a rate hold. If your mortgage is coming up for renewal or you’re thinking of refinancing, now would be the time to do so.
This could be a false start, but if it’s not you’ll be kicking yourself for missing out on the chance to lock in to fixed mortgage rates when they were at record lows.
Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians, available now on Amazon and at Chapters, Indigo and major bookstores, and as an Audiobook on Amazon, Audible and iTunes.