The Canada Mortgage and Housing Corporation (CMHC) predicts that 2.2 million mortgages will face an interest rate shock in 2024 and 2025. “This is the first time in over 40 years that rates have risen to this level so quickly,” recalls Tania Bourassa. -Ochoa, Senior Specialist, Housing Research at CMHC.
In the field, Sophie Gelinas, a broker at Dominion Mortgage Centers, indicated that 8% of her clients will have to renegotiate their mortgage loan before the end of the summer, and an additional 6% will be added before the end of the year. In 2025, 34% of its customers will do the same. Maxime Fortin of Momentum Mortgage Firm estimates that about 35% of his clients will need to renegotiate their mortgage loan in the next 12 months.
A weak economy
Most interest rate experts expect the Bank of Canada to begin cutting its key rate by 0.25% in June and continue until it reaches 2.5%. , half off the current rate of 5%.
Photo by Francois Roy, La Presse Archives
The Bank of Canada is walking on eggshells when it comes to cutting its rates.
A negative yield curve, or short-term rates being higher than long-term rates, supports the idea that economic growth will be lower in 2024, explains Lorenzo Tessier More, economist, Desjardins, Economic Studies. This will encourage the central bank to cut its key rate to a neutral rate of 2.5% by mid-2025, while dealing with the largest share of mortgage refinancing.
Will rate cut expectations come true?
However, expectations for rate cuts at the start of the year are similar to those at the start of last year, recalls Matthew Lachance, Canadian absolute return sovereign bond fund manager at Gestion Cristalin. But the rates did not come down. “We are postponing the start of the rate cut for a year,” he said. According to him, we could only see three rate cuts by the Bank of Canada between now and the end of the year, which would bring the key rate down to 4.25%.
Some economic indicators are not weakening as quickly as expected, so the Bank of Canada currently faces the risk of easing its monetary constraints too quickly and restarting the inflationary spiral.
Moreover, rate hikes as fast as we've experienced in the last two years can only have a huge impact on the economy, so we shouldn't rule out the risk of a hard landing in the economy. Into recession, predicts Matthew Lachance. “And if that proves to be true, interest rates will come down quickly,” he said.
Photo by David Boily, Law Press Archives
Housing shortages keep demand strong. A drop in rates of 1.5% or more can have the effect of overbidding.
What to do then?
Currently, the best 5-year mortgage rates are between 4.80% and 5.00% compared to the 1-year rate, which is around 6.60%. Maxime Fortin is among those who believe the Bank of Canada's rate cuts will be very gradual. Housing shortages keep demand strong. A rate cut of 1.5% or more risks triggering an overbidding effect, which would justify some patience by the central bank, according to him. Consequently, he believes that a fixed mortgage rate of less than 5% for 5 years is a very attractive offer right now.
Sophie Gelinas suggests a different approach that could be interesting in the event of a significant drop in rates. She chooses a variable rate term of 5 years. The rate currently stands at 6.25%, i.e. banks' prime rate minus 95 basis points (one basis point = 0.01%), a rate deemed advantageous, which will then be converted to a fixed rate for the remainder of the period provided rates fall sufficiently. Profits can be very interesting if rates fall quickly. But it is aimed at those who are comfortable with such a strategy, she adds.
About The Author
