Shopping for mortgage rates? Keep an eye on the U.S. election – National
Despite an oversized interest rate cut from the Bank of Canada last week, experts who spoke to Global News say Canadians shouldn’t be expecting much more discounting on fixed mortgage rates.
In fact, movements south of the border — a solid United States economy and the looming presidential election — could have more of an impact on the rates Canadian homeowners and would-be buyers can secure in the market.
The Bank of Canada picked up the pace in its rate-easing cycle last week with a half-percentage point cut, lowering the policy rate to 3.75 per cent.
But cuts of that magnitude haven’t been reflected in the bond market as of late, which is an important proxy for fixed-rate mortgages. Yields are instead higher on the five-year Government of Canada (GoC) bond, which lenders use to price the rates they offer on the popular five-year fixed mortgage.
The five-year GoC bond yield hit 2.65 per cent in mid-September, its lowest level in more than two years, but has since risen back above three per cent.
Bond market pricing is meant to reflect expectations for the Bank of Canada’s rate path, not necessarily responding directly to hikes or cuts from the central bank itself. That means communications from the Bank of Canada as well as data on inflation and the Canadian economy can shift bond yields, and by extension, mortgage rates.
Fixed mortgage rates have largely driven lower in the Canadian market over the past six months as the Bank of Canada lowered interest rates and signalled more cuts were coming, according to Penelope Graham, mortgage expert at comparator site Ratehub.ca.
Graham says recent data showing inflation had returned back to the central bank’s two per cent target, and dipped even lower in September, gave bond investors increasing confidence that the policy rate would dip lower.
“We’ve been entering this new rate cut cycle. So bond investors have been very reactive and receptive to that,” she says.
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Robert Kavcic, senior economist at BMO Capital Markets, tells Global News that the bond market had already fully priced in the 50-basis-point cut from last week, so there was no surprise from the bigger-than-usual step.
BMO projects that the Bank of Canada will continue to chart a lower path for its policy rate with a series of 25-basis-point rate cuts through to the middle of next year. If the central bank delivers cuts along roughly that pace, there won’t be much movement in the bond market, which is already pricing in the lower rates.
And because the bond market informs fixed mortgages, homeowners and buyers shouldn’t expect rates to fall much further, barring any major surprises in the economy, Kavcic says.
“This, in other words, could be pretty close to the lows that we see for the three- and five-year fixed mortgage rates,” he says.
How the U.S. election is affecting mortgages
The Bank of Canada’s big step being already priced in might explain why the bond market hasn’t drifted lower, but to explain why yields are rising, Kavcic looks to the U.S.
As recently as Wednesday, the U.S. economy has consistently posted economic results that outperform global peers, dampening long-held expectations for a decline from the American juggernaut. That, in turn, has reined in calls for the pace of interest rate cuts from the U.S. Federal Reserve, which only kicked off its own easing cycle last month.
Kavcic says the solid U.S. economic performance has lifted treasury yields south of the border, and Canadian bonds have “piggybacked” on those movements.
Then, there’s the U.S. election. With polls showing an exceedingly tight race for the White House between U.S. Vice-President Kamala Harris and former president Donald Trump, Kavcic says the bond market has started to reflect the potential of a second Trump term.
Trump’s economic proposals include blanket tariffs that experts warn could drive inflation higher on both sides of the border. That’s also putting upward pressure on bond yields, Kavcic explains.
There are a few factors that could drive bond yields in Canada back down, he notes.
The health of the Canadian economy has taken on increased significance to the central bank amid confidence that inflation is back under control, so signs of weakness could hasten the pace of rate cuts going forward.
Kavcic adds it’s not settled where the “neutral rate” is — a lower landing point for the Bank of Canada’s policy rate could force five-year bonds to settle lower than where they are today, for instance.
But Kavcic says these incremental shifts might end up being swallowed up in bond market pricing until the dust settles on the U.S. election.
“Some of these fine details get lost in the bigger picture,” he says.
Graham says she sees room for fixed-mortgage rates to drift a bit lower the more certainty emerges on the Bank of Canada’s pace of cuts.
But she adds that she’s seen an increasing popularity in variable-rate mortgages among Canadians, which do respond directly to the Bank of Canada’s policy rate movements.
Variable rates are still priced higher than most of the fixed alternatives, Graham says, but Canadians comfortable with a bit of risk could find they’ll get a better rate in the long term as long as the central bank rate cuts continue as widely expected.
Anyone shopping for a mortgage rate in today’s market ought to secure a rate hold ahead of the U.S. election, Graham says. Whichever way the bond market shifts in the wake of the vote, a rate hold of up to 120 days can ensure a homebuyer gets the lowest possible rate in the near term, she notes.
“That removes a little bit of that uncertainty for you as a borrower,” Graham says.
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