Where are Canadian mortgage rates headed in 2019? Experts weigh in

It wasn’t so long ago that there was hardly any doubt that Canadians would be seeing higher mortgage rates this year.

The Bank of Canada was widely expected to continue on its path of tightening monetary policy with continued increases to the overnight rate, which influences mortgages, particularly those with variable rates.

While that may still be a majority consensus among market watchers, mortgage broker Elan Weintraub is hearing conflicting viewpoints these days. “I think there’s a lot of uncertainty in the marketplace right now,” he tells Livabl.

“If you rewind to maybe six months ago, the Bank of Canada was pretty clear that they would be raising rates, but now that there’s a lot of problems with oil, there’s problems with Trump, there’s a lot of things going on,” he adds.

Bank of Canada rate hike(s) widely expected in 2019
Still, Weintraub is holding to his prediction that the Bank of Canada will hike rates one to two times this year, likely once in the spring/summer and perhaps another hike in the winter. In a note published today, TD Economics echoed Weintraub’s prediction for further rate movement starting this spring.

Since July 2017, the Bank of Canada has increased the overnight rate on five occasions. Each time it was by 25 basis points, with the last hike this past October leaving the rate at 1.75 percent. Most recently, the bank held the rate steady during its policy announcement today.

While Weintraub’s view is widely shared, he acknowledges not everyone is on the same page. “There are even some people that are thinking that there might be a decrease on the way,” he notes.

But not everyone agrees
Capital Economics, a bearish economist research firm, is one of them. Capital Economics forecasts the central bank will need to cut the overnight rate towards the end this year.

In a response to the Bank of Canada’s latest rate announcement, Capital Economics reiterated its call for lower rates in late-2019.

“If we’re right that oil and housing will be a bigger drag on the economy than the Bank expects, then further interest rate hikes are very unlikely and the odds of interest rate cuts will rise in the coming quarters,” writes Stephen Brown, Capital Economics senior Canadian economist, in a note.

While Capital Economics remains somewhat of an outlier, others — even those who think a hike is on the horizon — are at least entertaining the possibility that the central bank will backtrack on rates.

Canadian credit union Central 1 anticipates the Bank of Canada will raise the overnight rate by 25 basis points in October. But that outlook is based on oil prices increasing and remaining steady, U.S.–China trade war prospects lowering, and the global economy stabilizing.

“A worse-case scenario — where U.S.–China tensions escalate or U.S. policies cause more disruptions and its political situation worsens — would bring a rate cut scenario into play,” Central 1 writes in a report.

Variable and fixed-rate mortgage borrowers benefit from policy moves
For now, though, borrowers need not worry about dramatic changes to interest on their mortgage rates — at least in the short term.

Real estate portal Zoocasa notes that it isn’t just holders of variable rate mortgages who are benefitting from the Bank of Canada’s current hands-off approach.

“While the fixed cost of borrowing isn’t directly impacted by the BoC’s monetary policy, it is influenced by the bond market, which is very sensitive to interest rate movement,” writes Penelope Graham, managing editor of Zoocasa.

“Bond investors are happy when the BoC cuts or holds its rate, as it means the yield on their investment – its payout upon maturity – remains competitive in comparison to newly-issued bonds.”

In fact, BMO Economics suggests that variable rates seem set to remain relatively flat this year in light of the Bank of Canada’s less-aggressive approach this year and fixed rates may even decline.

“The chunky decline in longer-term bond yields on both sides of the border could translate into modestly lower fixed-rate mortgages, if history is any guide,” writes BMO Senior Economist Robert Kavcic, in a note to clients.

Weintraub agrees. “There could be a little bit of softening in the fixed rate pricing, and fixed rates could come down slightly in the next couple months,” he tells Livabl. “The banks need to do volume, they need to get the money out there, they need to lend money.”