Monthly Market Update - November 15, 2023

Purchasing an owner-occupied rental property in Canada can be a strategic way to build wealth while securing a home for yourself. But if you’re planning to put down less than 20% of the property’s purchase price, you’ll likely need mortgage default insurance. Here’s what you need to know about how mortgage default insurance works for owner-occupied rental properties.

What are Canadian mortgage rates going to do in 2025? We do not have a crystal ball, and the markets are sending mixed signals right now. However, we do think that more rate cuts are coming but are concerned that fixed mortgage rates are near their floor. What might all this mean? – read on. 2025 Mortgage Rate Prediction We expect variable mortgage rates to decline a further 0.50% to 0.75% in 2025. This will bring them below fixed mortgage rates for the first time since 2022. It is historically the norm for variable mortgage rates to be below fixed mortgage rates. This means five-year variable mortgage rates could be in the range of 3.6% to 4% by the end of the year. We do not expect much change in fixed mortgage rates in 2025. Bond yields have modest rate cuts already priced in and are resisting further declines. The recent steep increase in the US 10-year bond tells us that the bond market thinks central banks are wrong to cut rates further. We must pay heed to those signals since fixed mortgage rates depend on the bond market. We anticipate five-year fixed mortgage rates to range between 3.8% and 4.5% for most of the year. We can only rely on market inputs to generate our own expectations for mortgage rates in 2025. Those key inputs include: The Bank of Canada has indicated more rate cuts may be coming in 2025, but the pace and size of the cuts will be more gradual; Economists are forecasting a weakening Canadian economy. When the economy weakens, the central bank tends to cut rates to provide economic stimulus; The US Federal Reserve has stated they are in no rush to cut rates; The US 10-year bond has risen by 0.85% since the Federal Reserve began cutting rates in Sept 2024; Canadian 5-year bond yields are unchanged since August 2024 and only 0.15% lower than in mid-Jan 2024; US Federal Reserve reluctance to cut rates may limit how much the Bank of Canada can cut. When the Bank of Canada cuts rates more than the US does, it hurts the value of the Canadian dollar; and Analysts in Canada and the US expect rate cuts in 2025. There are many risks that are not priced in yet that could materialize. Economic weakness will increase the likelihood of more rate cuts and could even reduce bond yields. Economic strength will eliminate the need for rate cuts and could even lead to higher rates. There are also political and geopolitical risks that are not our place to opine on. They are difficult to predict but could significantly impact our interest rate markets in 2025, a year currently marked by uncertainty. What Happened to Mortgage Rates in 2024? The Canadian market entered 2024 with high expectations for multiple Bank of Canada interest cuts, starting as early as March or April. The cuts came a bit later than anticipated, with the first cut on June 5. We saw cuts totaling 1.75% from June through December. The last two cuts, in October and December, were consider ‘jumbo’ cuts of 0.50% (the usual cut is 0.25%). These cuts had the expected direct impact on variable-mortgage rates which dropped by the same amount. Fixed rates are ‘forward-looking’, so they move when expectations change. As the chart below shows, they dropped in anticipation of the cuts but, once the rate cuts gathered steam later in the summer, they remained relatively flat.