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As 2016 comes to a close and we look forward to 2017, a common question that we have been asked by our clients is “what are your mortgage rate predictions for the upcoming year?” This is a great question and has an effect on many of our clients who are looking at their upcoming mortgage renewal options or purchasing a new home.
Lets first start with a quick background on where rates come from. Really simply fixed rates are based upon a spread above the bond yield. For example if the five year bond is 1.0% and a lender would like a 1.5% spread then they will lend five year fixed rate mortgage funds at 2.5% (1.0% + 1.5%). Variable mortgage operate in a similar way but are based upon the bank of Canada prime rate and a discount or addition to it. For example many banks currently lend at prime – 0.5%, with prime being 2.85% this results in a variable rate of 2.35%.
This brings us to the upcoming year and some of our mortgage rate predictions. From a pure economic perspective we have not seen any projections for significant increases in the bond rates or the bank of Canada prime rate so within a typical market we would not anticipate any significant rate changes this year. Unfortunately due in large part to government intervention we are not dealing in a typical rate market. Within the past couple of months the government has made significant changes to the Canadian lending industry in an effort to make an already very conservative system even more so. These changes have included increasing the mortgage rate that clients have to qualify with to be approved for their new home mortgages, restricting refinances, and further limiting amortizations. One of the less talked about but more significant changes for our clients has also been the increased regulatory costs and capital cost requirements that the government has imposed upon the lenders. The government has increased the amount of money that lenders are required to maintain on deposit in order to lend along with increasing the compliance required for mortgage lending. Both of these changes act like a tax and cause lenders to be less profitable by reducing the amount of funding they are able to offer (or forcing them to raise investment returns to attract additional funds) along with hiring additional staff to fulfill the higher level of compliance required. As in all taxes or costs, this ultimately gets passed to the consumer or in the mortgage world, the purchaser or borrower. With this in mind we do anticipate some mortgage rate increases, not driven by market forces, rather driven by government policy.
If your mortgage is coming up for renewal in the first part of this year or you are planning on purchasing a new home I would recommend a pre-approval that holds your mortgage rates for 120 days so you can be partially insulated against rising interest rates and costs.
Please always feel free to contact me directly with any mortgage questions or if you would like to talk through our mortgage rate predictions.