Canadian mortgage rate forecasts will rise even before the BoC hike: Desjardins

A large Canadian financial institution sees higher mortgage rates in your future. The Desjardins mortgage forecast shows that they expect mortgages to continue to climb from here. They see 5-year fixed mortgage rates reaching pre-pandemic levels by next fall. This is ahead of the Bank of Canada’s first scheduled overnight rate hike.

Canadian mortgages set to rise ahead of hikes

Even if the Bank of Canada (BoC) maintains the overnight key rate until the fall, mortgages will climb. Desjardins sees the 5-year fixed rate reach 3% by the fall of next year. That would be an increase of almost 50% from the end of last year. At that number, the 5-year fixed mortgage rate would be around pre-pandemic levels. It would be a gradual tightening of the market, without the influence of the overnight rate.

Found a way around the stress test? This would have a pretty big impact on the debt that we can bear. Raising the mortgage rate from 2% to 3% reduces maximum mortgage debt by almost 10%. As for the existing owners, they would obviously have no impact until the renewal. People undergoing the stress test are unlikely to see a difference in their leverage. Unless the rate hike increases the stress test rate.

Improving economic conditions and inflation are probably the cause

The end of quantitative easing (QE) and inflation are contributing to this trend. QE drives up the cost of bonds, reducing returns for investors. This has a desired ripple effect, lowering mortgage rates. The BoC announced that it would start to gradually reduce QE a few weeks ago. They are generally expected to stop all of this by the end of this year. The reduction (and the end) of QE is a significant removal of the downward pressure on mortgage rates.

Inflation expectations are also an important factor – although high levels are a passing phase. Inflation was almost zero last year, allowing investors to accept low returns. Now that inflation is back, expectations of higher returns are returning. No investor is looking for a return below inflation. Higher yields come with higher mortgage rates.

The expectation here is based on yields that won’t increase until the fall of next year. At the current pace of economic recovery, most see the fall as the likely time when the BoC will raise rates. Some economists even believe that an earlier rise is more likely than a later rise. If that were to happen, mortgages would climb even faster than expected. A scenario that many would have thought unlikely less than a year ago.

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