Five Key Questions for Mortgage Borrowers to Focus On

Last week was relatively quiet for mortgage-related news.

The latest U.S. inflation data (for July) showed that overall U.S. inflation increased by 0.1% on a year-over-year basis, which was less than the 0.2% rise the consensus had been expecting. Bluntly put, this latest report isn’t likely to change anyone’s pre-existing view of what the U.S. Federal Reserve might do next.

In today’s post I’ll reflect on some of the forces that will affect Canadian mortgage rates in future by highlighting five key questions that borrowers should be focused on as we look toward the fall market (in order of importance)

• Will our regulators enact a sixth round of mortgage-rule changes and require conventional mortgage borrowers (who have at least 20% equity in their properties) to qualify using the Mortgage-Qualifying Rate even in light of the current slowdown in the Greater Toronto Area housing markets?
• Will the Bank of Canada (BoC) raise its overnight rate in response to our strong economic data, even as the U.S. economy shows signs of slowing and the U.S. Federal Reserve strikes a more cautious tone? (If so, what will that do to the exchange rate between our two countries, and if the Loonie soars higher, will that kill the hard-won momentum in our manufacturing sector that has fueled our recent run?)
• Will our inflation rate remain stubbornly low, even as our economy continues to hum along and employment demand stays robust? (And if this disconnect finally begins to reconcile itself, will it be because inflation starts to rise or because growth begins to slow?)
• Will the Fed follow through on its plans to stop rolling over (renewing) the U.S. treasuries that it loaded up on during the financial crisis in 2008? (And if it does, will that send both U.S. and global bond yields soaring as bond markets struggle to absorb this additional supply?)
• Does the recent rise in commodity prices signal an acceleration in global economic output? (Or is it just a short-term blip that reflects changes in the supply of commodities, and not the demand for them?)

Of course, the questions above assume that President Trump and Kim Jong Un don’t decide to start a war that replaces the fall market with a nuclear winter instead. But that outcome is beyond my pay grade and not one I’m inclined to speculate on.

Five-year Government of Canada (GoC) bond yields fell seven basis points last week, closing at 1.47% on Friday. Five-year fixed-rate mortgages are still available at rates as low as 2.64%, and at rates as low as 2.79% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance can find five-year fixed rates in the 3.04% to 3.09% range.

Five-year variable-rate mortgage discounts remain largely unchanged and are still available at rates as low as prime minus 0.90% (2.05% today) for high-ratio buyers, and at rates as low as prime minus 0.75% (2.20% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.45% to 0.70% range, which works out to between 2.25% and 2.50% using today’s prime rate of 2.95%.

The Bottom Line: GoC bond yields have leveled off of late and the BoC hasn’t indicated that it plans to raise its policy rate at its next meeting in September. Those factors suggest that both our fixed and variable mortgage rates should stay at their current levels over the near term, and the answer to the five questions outline above will go a long way toward determining which way they go after that.