As you likely already know, the economies of Canada and the United States are closely linked. As such, and since the US is Canada’s largest trading partner, interest and mortgage rates in Canada tend to follow closely the interest and mortgage rates in the US.
In today’s blog, we are going to discuss interest rates, mortgage rates, define a few terms, and talk about what the forecast is for 2024 for all these rates.
Interest Rates
In Canada, interest rates are determined by the Bank of Canada, which sets what is called the “Overnight rate.” The Bank of Canada or BOC, in general, tries to keep inflation “low, stable, and predictable.” BOC’s overnight rate is considered a “policy” rate, one that guides banks and businesses in their economic policies. The BOC overnight rate functions like the Fed does in the US regarding interest rates.
In response to any changes in the BOC’S overnight rate, banks will make very similar changes to their prime rate. Each major bank in Canada sets its own prime rate, but these are usually very similar to other prime rates among Canada’s “Big Six” banks: The Royal Bank, The Bank of Montreal, The Canadian Imperial Bank of Commerce, The Bank of Nova Scotia, Toronto-Dominion Bank, and the National Bank of Canada. Sometimes the National Bank of Canada is not included in this list, and the other ones, which have the most assets are called the “Big Five.”
The prime rates in Canada (and in the US) determine what the interest rates are for the rest of us, the mortgage rates (when mortgage rates are not already fixed), rates on lines of credit and credit cards, etc.
Mortgage Rates
So, as mentioned above, mortgage rates at any given time depend on the Prime Rate, which depends in turn on the overnight rate from the Bank of Canada. In addition, mortgage rates from a Mortgage Investment Corporation will be somewhat higher than the mortgage rates from the major banks because you are paying for certain advantages that come with MIC mortgages. These rates will, however, also change with changes in the Prime Rate.
Forecasting interest rates and mortgage rates is never an exact science. We may have certain indicators to work with, but it is not an exact science, just as no one could predict the arrival of COVID-19 and its effect on the economy.
That said, this is what we know. Interest rates have risen dramatically since the spring of 2022 as those who set the rates are trying to quell inflation. Interest rates were very low for a long time, and those purchasing anything requiring a loan liked that because the loans did not have a high interest rate.
What a lot of younger individuals do not realize is that Canada (and the US) has experienced significantly higher interest rates before now. In the late 1970s and 1980s, interest rates were very high, with prime rates well over 10 percent and in some cases over 15 and over 20 for short periods.
So, those of us who are older may not be thrilled with today’s rates, but we are not shocked by them. Most of the big thinkers forecast lowering rates during 2024 in response to cooling inflation. Remember the overnight rate responds to inflation. So, if inflation continues to cool, so will the overnight rate. If the overnight rate goes down, then the Prime Rate will also go down, and then mortgage rates will follow.
How the national housing market does overall depends heavily on whether interest rates go up or down. If they go down as predicted, then the housing market should heat up. Another potential influence on the housing market is the recent landmark US court case and settlement in which the National Association of Realtors in the US agreed to change how real estate commissions are calculated, effectively lowering them for buyers. This will likely trickle up to Canada and help the Canadian housing market eventually.
Metropointe Mortgage Investment Corporation was founded in 2011 and offers the ability to invest in a diversified pool of mortgages secured by real estate in British Columbia. In addition, Metropointe also acts as a private mortgage lender.
If you have questions about our blog or would like to contact us regarding investing or borrowing, please call us in Surrey at (604) 449-1700.