Canada’s Top Mortgage Rates

mortgage rates

Update on Canadian mortgage rates: June 2023

For those who are paying back mortgages, June has not started off well.

The Bank of Canada’s decision to raise the overnight rate from 4.5%, where it had remained unchanged since January, to 4.75% on June 7 made headlines for the entire month. The recent economic performance of Canada, which has been better than expected, and an increase in spending on interest-sensitive products were cited as the causes of the increase by the Bank.

Increased overnight rates correspond to increased variable mortgage rates. Homebuyers shouldn’t be impacted by this as they’ve mostly given up on variables in favor of fixed-rate mortgages this year. However, it will put extra strain on the finances of homeowners who chose variable-rate loans before interest rates started to rise.

However, the cost of fixed-rate mortgages is also staying flat. Many of Canada’s biggest lenders raised their three- and five-year fixed mortgage rates from the end of May to the beginning of June, keeping pace with rising three- and five-year bond yields.

Reduced purchasing power may hinder homebuyers who are getting ready for the summer housing market. Buyers who received pre-approval before interest rates began to rise should at least feel some relief.

Mortgage rate forecast

What’s the forecast for mortgage rates in Canada in 2023?

Mortgage rates in Canada are expected to decrease in 2023, but when and by how much depends on the state of the economy and how sticky inflation proves to be.

If government bond yields continue decreasing, they’ll eventually drag fixed mortgage rates down with them. Variable mortgage rates won’t decline until inflation is trending toward 3%. The Bank of Canada expects that to happen in the middle of 2023.

How high will mortgage rates get in Canada?

Variable mortgage rates are unlikely to surpass their current levels of around 5.5% to 6.5%. Expect them to plateau through early 2023 and hopefully decrease — very slowly — toward the end of the year. A best case scenario might see variable rates drop by 0.25% to 0.5% before 2024 rolls around.

Fixed mortgage rates may prove a little more volatile in 2023. Fixed rates started the year by declining, but if the Canadian economy gets mired in an extended recession and government bond yields increase, lenders won’t hesitate to raise their fixed rates. Barring such financial turmoil, fixed rates could wind up closer to 4% later this year.

Our guide to comparing mortgage rates in Canada

What’s a good mortgage rate?

A good mortgage rate is the lowest possible rate you can qualify for based on the mortgage type you want and the amount you need to borrow.

According to Canada Mortgage and Housing Corporation, the average conventional mortgage lending rate for loans with 5-year terms was 7.18% in 2001, 4.57% in 2011, and 3.28% in 2021. Relative to the average, 5% would have been an excellent rate in 2001, but it wouldn’t have been so great in 2021.

Unfortunately, you can’t go back in time to score a better mortgage rate. All you can do to find the best deal is compare the rates on offer today.

And it’s important to keep in mind that a lender’s advertised rate is only the beginning of the story. The actual mortgage rate you’re offered will be determined by your credit score and other personal financial factors.

Why it’s important to compare mortgage rates before applying

A mortgage is the biggest loan most Canadians will ever have to pay back. Keeping monthly mortgage payments manageable is key to living comfortably with such a large debt. The rate of interest charged to finance a home purchase, e.g the mortgage rate, has a huge impact on the total cost of your loan.

Paying an unnecessarily high rate will cost you money. That being said, rates shouldn’t be the only determining factor when comparing lenders; penalty costs, portability and overall customer service are also key considerations.

Doing thorough research, understanding your mortgage objectives and comparing options side by side will give you the confidence that you’re getting a competitive rate with a mortgage lender that will meet your needs.

How to choose the best mortgage rates among lenders

Comparing mortgage rates between lenders can be more complex than it appears.

First, it’s crucial to compare annual percentage rates and not just interest rates. While the interest rate is a set percentage that a lender charges you to borrow money, APR includes the interest rate, fees and other closing costs that are set by the lender.

Ideally, lenders will publish APRs in addition to interest rates, but if they don’t, APR can be calculated by hand:

  • Divide total fees by the total loan amount.
  • Multiply the result by the number of days in the year.
  • Divide that result by the total number of days in the loan’s term.
  • Multiply that result by 100 (and add a % sign).

Looking at the APR will give you a more accurate idea of the true cost of your mortgage. Let’s say two lenders offer you fixed-rate mortgages with a 4% interest rate, but Lender A’s has an APR of 4.25% while Lender B’s APR is 4.175%. You can see that Lender B is charging lower fees, meaning the second mortgage offer is actually the better deal.

When looking at mortgage rates, take care to compare identical mortgage products, terms and amortization periods. Other important considerations when comparing mortgage rates across lenders include fees (like home appraisal fees), prepayment penalties, portability, the ease of the application process and a lender’s customer service ratings. You may also think about whether you’re comfortable going with an alternative lender or want to stick with a federally regulated bank.

How are mortgage rates determined?

Even though lenders will offer different rates to different borrowers based on their unique financial situations, mortgage rates are actually determined by the current state of Canada’s economy. Variable mortgage rates are tied to the Bank of Canada’s overnight rate, while fixed mortgage rates are shaped by activity in the bond market.

The Bank of Canada’s overnight rate

The Bank of Canada’s overnight rate is the interest rate financial institutions charge one another to borrow money. The BoC increases or decreases its rate based on market conditions, primarily the country’s rate of inflation. If the economy is booming and inflation is rising too quickly, the BoC will try to curb it by increasing its benchmark rate, as higher interest rates tend to have a calming effect on the economy. (People borrow and spend less.) If the economy is slowing and inflation is not a concern, the BoC will lower its benchmark rates to stimulate economic activity.

When the overnight rate rises, it’s more costly for financial institutions to borrow money. To recoup their losses, banks pass on this expense to their customers by raising their prime lending rate. This is of particular concern to variable mortgage rate holders. Variable mortgage rates are tied to a financial institution’s prime rate, so when a bank raises its prime rate, clients with a variable mortgage will experience an increase in their mortgage rate.

The government bond market

Financial institutions invest in government bonds to create a reliable profit flow, particularly five-year Government of Canada bonds. The bonds are issued at a set price, but their value fluctuates when they’re traded on the open market. As bond prices rise and fall, their yields do, too.

Canadian lenders’ five-year fixed mortgage rates follow those yields quite closely. If bond yields increase (which happens when bond prices fall), fixed rates won’t be far behind, and vice versa. Historically, five-year fixed rates have usually been around 150 basis points higher than the five-year bond yield.

The bond market does not affect the rate of variable rate mortgages, only fixed.

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