Rates will be even lower when it's time for me to renew my mortgage, right? Right?!
The world’s central banks, including the Bank of Canada, have begun lowering interest rates, with financial pundits expecting more room for future cuts. But what if rates stay “higher for longer”?
December 4, 2024
I don’t have to tell you that it’s become harder for Canadians to afford to own a home in recent years. High inflation only added to this stress after the pandemic.
How did central banks worldwide fight that inflation? Well, by increasing interest rates. Only recently have they started cutting them, but they remain much higher than they were pre-COVID. As I write this, the Bank of Canada [BoC’s] key interest rate (which directly affects mortgage rates and was 1.75% in February 2020), is now an intimidating 3.75% , and this despite a whopping 0.5% cut in October. These higher borrowing costs are stressful for those looking to take on their first mortgage or, perhaps even scarier, renew the one they already have. Many experts are confident rates will continue to drop , which is music to the ears of many Canadians; after all, the idea of renewing your 2.9% mortgage at close to 5.5% is a more frightening concept than most current horror movies. The problem is that we might not get the rates borrowers are hoping for. Even BoC governor Tiff Macklem says the Bank “doesn’t know the future.”
Great. So what do we know?
No, he’s not watching the latest thriller. He just saw the refinancing rate on his mortgage.
The times, they are a-changin’
“Trends are shifting,” writes Robert Lavigne, OMERS Senior Managing Director, Economic Research, in his piece The Brave New Post-Pandemic Economy, published earlier this year. At OMERS, Robert advises the boards for both OMERS Sponsors Corporation and OMERS Administration Corporation (who work together to govern OMERS ), the Chief Investment Officer, as well as the public and private market investment teams on a wide variety of economic and financial issues. Robert explains that “the structural drivers that underpinned the pre-pandemic era (2010-19)… have faded or even reversed.”
He sees five “mega trends” that will shape the rest of this decade:
Aging populations – changes in savings behaviour and a shrinking workforce.
Accelerating climate change – large weather disruptions and massive investment in the energy transition.
Hardening geopolitics – rising military spending, a rewiring of global supply chains, greater trade restrictions.
Populism ascendant – bigger governments, higher deficits and institutional erosion.
Surging innovation – breakthrough technologies such as AI.
Robert believes the impact of these mega trends could result in more inflation, with larger deficits and more deregulation under the new Trump administration likely to worsen the situation in the short run.
“This is an environment of persistent overheating pressures,” says Robert. “The Federal Reserve (the US central bank) may not have that much room to cut. I believe this is already reflected in long-term yields (interest rates on 10-year+ government bonds) in the US, which are a key driver of Canadian mortgage rates.”
Not the best thing to hear if you’re a mortgage shopper.
“Things are not going back to the way they were pre-pandemic,” Robert adds. “Our analysis suggests that the future will likely feature higher inflation and interest rates, but also stronger economic growth.”
If only there were a way to simplify all this into a catchy term.
Higher for longer
Oh look, there it is.
Those of you mortgage renewers or potential buyers who panicked at the words “higher” and “interest rates,” please pick your head up off the table. This doesn’t mean Canada’s central bank will stop cutting policy rates in the short term. Robert says “the BoC feels they have more room to do so. This will provide some relief for owners of variable rate mortgages, but it’s not clear there is room for long rates to fall much further, barring negative surprises. Mortgage rates are very unlikely to return to their pre-pandemic lows anytime soon.”
In other words, curb your enthusiasm.
So, as you prepare to head to the bank to renew or obtain a new fixed-rate mortgage, it might be a good idea to come to grips with the impending sticker shock. Despite the BoC cuts, mortgage rates remain much higher than they were during the lockdowns, when many of us last visited our bank manager. Thankfully, many banks are offering to prolong the amortization period (add extra years to your mortgage) to lower monthly payments. In the end, there’s no free lunch.
The key to thriving in a higher for longer environment is understanding that higher rates reflect stronger economic growth. This means more chances to grow any money you’ve put aside – if you know where and when to make the most of it. For first-time homebuyers and those up for renewal, the benefits of saving and potential for strong investment returns can offset high borrowing costs. However, it still doesn’t make facing those costs any less jarring.
The bottom line
“We expect there will be more investment possibilities for individuals at higher rates of return, but the window of opportunity will not be indefinite,” says Robert. “Eventually, [this] will come to an end. It can do so smoothly if sound policies and reforms are implemented, or more abruptly through misguided policies. However it occurs, we expect economic growth to decline over the next decade. Average rates and inflation should then also fall.”
Seems we may have a while to wait. In the meantime, try to drum up some courage as you head to the bank for that renewal…
The Relatable Economist is an ongoing written series focused on how the economy, geopolitics, markets and more are impacting our day-to-day lives, discussing topics that matter to you, even if just to share with your friends at your next get-together or in the stands at your child or grandchild’s hockey game. Have a topic you want to learn more about? Write to us at therelatableeconomist@omers.com.
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