Fixed Mortgage Rates Are Expected To Go Down This Week: What This Means For Toronto Real Estate

Fixed Mortgage Rates Are Expected To Go Down This Week: What This Means For Toronto Real Estate


There’s finally a change of tone from The BoC last week when they spoke in front of the House of Commons but it doesn’t seem like most people caught on yet.

They did the same old-talk about the need for interest rate hikes because of high inflation but for the first time, they’re also touching on the downside risks of over tightening.

So in this video, let’s dive into this and see how the bond market is reacting, how these are affecting mortgage rates, and ultimately how this might change things up for the Toronto real estate investment market.

Bank Of Canada Rate Hikes

We started rate hikes back in March but it wasn’t until July when Bank of Canada got serious and started “front loading” rate hikes. In July, the rate hike went way over expectations and going up by 100 basis points. After that, The BoC hikes rates a bit less each round going to 75 basis points in September and then 50 basis points in October. 

They’ve made it clear that they’re not done yet and we are expecting then to go up somewhere between 25 to 50 basis points, taking the target overnight rate from 3.75% to somewhere between 4% to 4.25% percent by December 7th, that’s Wednesday of next week.

With these aggressive hikes, almost everyone expects a recession coming. Here’s the thing: typically recessions last about 10 months long – it’s painful but still relatively bearable. Bucking this trend however was the recessionary period between the mid 70s to 90s that was extremely long. There were actually four smaller recessions that happened throughout that period, and a repeat of that is something the BoC definitely wants to avoid this time around.

Bank Of Canada On Over Tightening

It seems like The BoC has gotten a good grasp on inflation now. Data doesn’t show it yet, and it’s still expected to be high by the end of this year at 7%. But then after that, it’s expected to go back to 3% by end of 2023, and then 2% by the end of 2024. If that’s under control, they’ll shift their eyes over to our GDP. 

Right now, The BoC expects GDP to drop to 1% by 2023, and then go back up a bit to 2% in 2024. In other words, our economy is expected to be extremely weak, and they need to treat this situation with kid gloves to avoid a slowing things down more than needed which ultimately has bigger, more harmful consequences.

As you can see, this is a clear change in tone from before. After the rate hike next week, we’d be close to 4% to 4.25%. Based on current bank interest rate projections, we might have another small hike by end of January before topping out somewhere between 4.25 to 4.5%. 

This actually sounds pretty in line with Tiff Macklem’s recent statement last week, saying, “This tightening phase will draw to a close. We are getting closer, but we are not there yet.”

Bond Market Reaction

Again, the bond market is reacting again and we’re seeing an even more inverted yield curve lately. Take a look at this chart that shows the 10 year minus 2 year Canada bond yield spread, and you can see that we’ve dipped more negative. 

The difference is close to -100 basis points right now, and this hasn’t been seen in over 30 years. In other words, what this means is that traders are pricing in an even higher chance of a recession. Interest rates may come down more than previously expected beyond the 2 year mark, and fixed mortgage rates have likely peaked at this point.

Impact On Fixed Mortgage Rates And Toronto Real Estate

And so this brings me to where fixed mortgage rates are at right now. Fixed rates are based on 5 year bond yields plus a mortgage spread which is really up to the bank’s risk appetite. 

What’s been happening is that when bond yields spiked, banks have been really quick to follow and hike fixed mortgage rates. On the other hand, when bond yields come down, we haven’t seen banks adjust fixed mortgage rates downwards, perhaps because they want to build a bigger risk premium buffer for themselves.

But this week, we might finally see it come down according to some bank sources. We’ve been using 5.5% which seems like the consensus number these days for number crunching. If this does come down to 5.2% and more people start using the lower interest rate to calculate their numbers, then this is a clearer sign of a bottom and reversal. 

In theory, if rents don’t change much more beyond this point which I think is pretty likely, then prices can come up 3% to be at the same break even cash flow position.

How We Can Help

If you’ve been watching the market, you may have noticed that there’s not a lot of listings these days. It’s true … we’ve entered the holiday slowdown by now. But if you’re ready to buy, that doesn’t mean you should just wait till the new year. 

It’s definitely possible that a deal or show might pop up from now until next year and you’d only be able to actually pull the trigger on them if you’re ready. So while you wait, make sure you make the most out of your time and get your financing ready and then reach out to us. You don’t have to actively watch the market over the holidays, because that’s what our team is here for. 

We’re a real estate sales brokerage that focuses on investing in houses and multifamily homes in Toronto. When you work with us, we take the time to understand your needs, teach you the ropes, show you these deals, crunch all the numbers, and eventually help you buy the best one for you. But that’s not all. Our team also provides renovation guidance, leasing, and property management if you need it. So, just connect with us if you want to learn more about our services!

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