Impact of Economic Factors on Mortgage Rates in Canada: A Deep Dive

The most vital part of the home-buying process is mortgage rates. As the mortgage rates can directly affect your monthly payments. No matter if you are a first-time home buyer, refinancing your property, or maybe looking to switch between lenders. So, have you ever wondered why mortgage rates change? Like how do they suddenly go up/down?

In this blog, we will deep dive into this to understand the different economic factors that influence mortgage rates in Canada.

What Are Mortgage Rates?

Basically, a mortgage rate is an interest rate that you pay on the loan. The loan which you took to purchase the home or property. It is an expressed percentage of the total amount you borrowed.

Remember one thing, mortgage rates can fluctuate. They are dependent on various economic factors which we will discuss below.

The Bank of Canada and Its Influence on Mortgage Rates

The Bank of Canada (BoC) plays a major role in determining the interest rates. The BoC sets the overnight lending rates. It is the rate at which BoC lends money to commercial banks. When the BoC raises or lowers the overnight rate, commercial banks often follow it by increasing or decreasing their mortgage rates. This rate also influences the interest rates that banks charge the borrowers. For things like:

• Mortgages
• Loans
• Credit Cards

Example,

To fight increasing inflation in 2022, the BoC raised interest rates multiple times. This led to rises in mortgage rates everywhere. For a 5-year fixed-rate mortgage in 2021, the mortgage rate was about 2%, later it was approximately or above 5% in 2022. The homeowners had to pay more each month. Consequently, families having trouble making the $1500 mortgage payments found themselves paying more than $1800 a month when the rates rose.

Inflation and Its Impact on Mortgage Rates

Inflation refers to the rate at which the prices of goods and services increase over time. When the inflation increases, the value of the currency decreases and vice versa. That means people need more money to buy the same things. The Central Bank or BoC often raises interest rates to control inflation.

As we all know, higher interest rates make borrowing expensive and slow down consumer spending. Hence, it reduces inflation. This is the most prominent reason why mortgage rates fluctuate.

Case Study (2021-2022):

Canada experienced rising inflation due to supply chain disruptions which was caused by the COVID-19 pandemic. The BoC raised rates in 2022 to control this inflation. It led to higher mortgage rates. A family who had been paying a mortgage of $1500 monthly at a rate of 2.5%, when rates increased to 4% found themselves paying over $1750. 

The Economic Growth of Canada and Mortgage Rates

The growth of Canada’s economy also has a big impact on mortgage rates. When the economy is doing well like:

• People are employed
• Businesses are making a profit
• Spending is high

All this can lead to inflation as we discussed above. On the contrary, when the economy is struggling or there is a recession going on, the BoC may lower the interest rates to encourage borrowing and spending. It may help to stimulate the economy. 

Example,

During the COVID-19 pandemic time, the economy faced a significant downturn. The BoC reduced the interest rates to stimulate the economy. This thing allowed Canadians to lock in historically low mortgage rates. As homebuyers took advantage of low rates, the housing market saw a significant boost in sales.

Employment Levels and Consumer Confidence

Home loan rates can also be impacted by consumer confidence and the employment sector. People feel more assured of their capacity to pay off debt when unemployment is low. This usually leads to more need for houses and loans, therefore raising costs. Lenders could balance this demand by increasing interest rates and therefore keeping the real estate sector from overheating.

Conversely, during times of great joblessness or uncertainty, banks may reduce mortgage rates to promote borrowing. Thus helping to stimulate economic activity.

Expert Opinion:

According to Douglas Porter, Chief Economist of BMO, says “When employment is strong and consumers are confident, people are more likely to take on larger mortgages. In these times, you might observe rates creeping up to keep market balance.” Higher demand can lead to higher rates as the economy seeks equilibrium.

Global Events and Their Ripple Effect on Canadian Mortgage Rates

What happens globally might also influence Canadian mortgage rates. A financial crisis that is going on in another part of the world, such as the 2008 global financial crisis can make lenders more cautious. Hence, driving up the mortgage rates. Similarly, the financial policies of big nations such as the USA can also influence Canadian interest rates.

Example,

The Canadian government had to step in to stabilize the economy during the global financial crisis in 2008. The Bank of Canada lowered interest rates to help homeowners. However, many mortgage lenders still raised the rates due to the uncertainty in the global markets. That made it even more expensive for Canadians to borrow.

Supply and Demand in the Housing Market

The demand and supply in the housing market play a vital role. The home prices will increase when there are more homebuyers than available homes. This thing can cause the mortgage rates to rise as lenders adjust to the higher demand. Conversely, when there is an excess of supply and fewer homebuyers then mortgage rates may decrease.

Case Study:

The two of Canada’s largest housing markets are Toronto and Vancouver. The home prices there have been soaring because of the limited supply and higher demand. In both of these markets, the mortgage rates tend to be higher. The lenders of both markets adjust rates to ensure that they are not too exposed to the risk.

In contrast, cities like Halifax and Ottawa have seen lower rates. As the demand is less there and the supply is surplus. Also, the competitive pressure on lenders is less intense.

How Can You Protect Yourself From Rising Mortgage Rates?

It is totally understandable that we can’t control these factors that influence the mortgage rates in Canada. But we can definitely take some steps to protect ourselves from rising mortgage rates. Let’s see how:

Lock In Fixed Rates

If you are worried about future interest rate increases then consider locking in a fixed mortgage rate for a longer term (like for 5 years). This will provide stability in your monthly payments. That will help you to manage any sudden market fluctuations.

Refinance

If you already have a mortgage going on then always keep an eye on interest rate trends. Also, don’t hesitate to consider refinancing if rates drop significantly. Refinancing can help you save money by locking in a lower rate.

Increase your Down Payment

A larger down payment can reduce the overall loan amount. It can help reduce your overall financial exposure if the rates increase. This may also help you to secure a better interest rate.

Conclusion

As we have already discussed above, the mortgage rates in Canada are influenced by so many economic factors. Like interest rates set by the Bank of Canada, inflation, economic growth, global events, and the housing markets.

Canadians can make sound decisions when it comes to buying a home or refinancing by understanding those factors. It is mandatory to stay updated on market trends. Also, to work with a knowledgeable mortgage advisor. To ensure the best possible rate for your situation.