Mortgage Basics

Have Variable Rates Peaked in Canada?

Have Variable Rates Peaked in Canada?
Written by
  • Ashley Howard
| 17 November 2023
Reviewed, 17 November 2023
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    Have variable rates peaked in Canada? As mortgage rates continue to dominate headlines, homeowners and prospective buyers are left wondering when the seemingly endless rise will finally come to a halt. The fluctuating variable rates have been a rollercoaster ride for many Canadians, with unpredictable increases causing financial strain. But is there light at the end of the tunnel?

    In this article, we explore the current state of variable rates in Canada and look at predictions for the future. While some experts believe that rates may have peaked, others remain skeptical about the possibility of a downward trend. We examine the factors that influence variable rates, such as inflation, monetary policy, and economic conditions, to provide a better understanding of the situation.

    Key Takeaways

    • Variable rates are directly tied to the Bank of Canada policy rate.
    • Historical trends in the policy rate can provide insights into whether variable rates have peaked.
    • The Bank of Canada Governing Council and economists remain split on whether rates need to increase, decrease, or remain stable.

    Understanding the Factors That Influence Variable Rates

    It’s essential to understand what influences variable rates in Canada to understand whether they have peaked. 

    Monetary policy plays a significant role in determining variable rates. The Bank of Canada uses the policy interest rate as a tool to manage the economy. They may raise rates to cool down an overheating economy or lower rates to stimulate growth. 

    Banks and lenders use the policy rate when determining their prime rate. Variable rates are directly tied to this prime rate, which increases or decreases in the same direction as the policy rate.

    Inflation is one of the main drivers of policy rate decisions. Central banks tend to keep interest rates low when inflation is low to stimulate borrowing and investment. High inflation can lead to higher interest rates to curb spending and control inflationary pressures.

    Economic conditions, both globally and domestically, can also impact variable rates. Factors such as GDP growth, unemployment rates, and consumer spending all contribute to the economy’s overall health. In times of economic uncertainty or instability, central banks may adjust rates accordingly to maintain stability and support economic growth. 

    The Canadian economy is also closely intertwined with the US economy. The Bank of Canada (BoC) typically makes interest rate decisions based on what the US Federal Reserve (the Fed) is doing. If the Fed increases interest rates, the BoC will likely follow to keep Canadian currency from devaluing against the US dollar. 

    Historical Trends of Variable Rates in Canada

    Historical trends can be valuable to gauge whether variable rates have peaked in Canada. Variable interest rates are tied to the Bank of Canada (BoC) policy rate. When this rate increases or decreases, lenders and banks will adjust their prime rate, with most following suit with the BoC by adding a premium of 2.20% to the policy rate to set their prime rate. 

    Over the past few decades, variable rates have experienced periods of both highs and lows. For example, in the early 1980s, variable rates soared to double-digit figures due to high inflation, a carry-over of stagflation from the previous decade. However, they have been relatively low until recently, providing borrowers with more favourable borrowing conditions. 

    It’s important to note that while historical trends can provide insights, they do not guarantee future outcomes. The current economic landscape and global polarization can significantly impact the direction of variable rates.

    Current Market Conditions and the Possibility of Variable Rates Peaking

    In the current market, variable rates have been trending upward, causing concern among borrowers. However, some experts believe that rates have or are nearing their peaks. The slowing economy and increasing unemployment could contribute to stabilizing rates.

    On the other hand, skeptics argue that the global economic landscape, including elevated inflation and the potential for interest rate hikes in the US, could lead to further increases in the Government of Canada bond yields, which would push fixed rates higher. Borrowers should remain vigilant and consider the potential for further rate hikes in their financial planning.

    Expert Opinions and Predictions on Variable Rates in Canada for 2024

    Experts have differing opinions and predictions on whether rates have peaked in Canada. Some argue that current rate increases are temporary and that rates have stabilized or may decrease by mid-2024. 

    The experts point to increased unemployment, stabilizing year-over-year inflation, and a cooling economy as the main reasons rates may have peaked. However, others are more cautious and believe that rates may continue to rise in response to US economic conditions and inflationary pressures. 

    The Bank of Canada Governing Council remains split on whether interest rates must increase further. Concerns remain around whether inflation is falling fast enough, and some of the Governing Council believe that rates may need to increase further to bring inflation back to the 2% target. 

    The BoC’s rate tightening takes 18 to 24 months to take effect. The first rate hike was 22 months ago, and the last was in July, leaving its full impact almost a year away. Conversely, further rate hikes could take the country into a prolonged recession, causing more economic peril than required to control inflation. Or worse, sticky inflation paired with high unemployment could cause a period of stagflation.

    Andrew Grantham, Senior Economist at CIBC, forecasts in The Week Ahead economic report that rates may gradually begin to lower by Q2 2024, citing weak employment growth in relation to population growth rate and unemployment peaking in excess of 6%. 

    Douglas Porter, Chief Economist and Managing Director Economics at BMO, forecasts in the EconoFACTS report that the BoC will keep rates on hold deep into 2024, citing that this will depend on whether the economy has cooled enough to bring underlying inflation lower. 

    Considerations for Borrowers with Variable Rate Mortgages

    For borrowers with variable-rate mortgages, evaluating their financial situation and risk tolerance is vital. Variable rates can provide flexibility and potential cost savings in the short term but also come with risk if interest rates increase. 

    Having a financial plan to handle potential rate hikes and ensure the mortgage remains affordable will be one way those with variable rates can protect themselves from rate increases.

    Borrowers should also stay current on relevant news on market conditions and review their mortgage contract terms regularly. Being proactive and considering options, such as switching to a fixed-rate mortgage or exploring rate lock-in features, can provide stability and peace of mind.

    Alternatives to Variable Rates in the Canadian Mortgage Market

    While variable rates may be attractive for borrowers when interest rates are low, other choices are available to Canadian borrowers.

    Fixed-rate mortgages offer a stable interest rate for a predetermined period, providing borrowers with certainty and predictable monthly payments. This option can be attractive for those who prefer a consistent budget and are willing to forgo potential savings in favour of stability.

    Steps to Take if you are Considering a Variable Rate Mortgage

    If you are considering a variable-rate mortgage, there are several steps you can take to make sure it is the right decision. 

    • First, assess your financial situation and risk tolerance. Consider your income stability, current and future goals, and ability to handle potential rate increases.
    • Next, research and compare mortgage options from different lenders. Look for competitive rates, favourable terms, and features that align with your financial goals. Consult with a mortgage professional who can provide guidance and help you navigate the complexities of mortgage products.
    • Finally, stay informed about market conditions and regularly review your mortgage contract terms. Monitor economic indicators, interest rate announcements, and any potential regulatory changes that may impact variable rates.

    Frequently Asked Questions

    When will interest rates decrease in Canada?

    Most economists have shifted their forecasts and believe we may see gradual decreases in interest rates by mid-2024.

    If interest rates have peaked, will I save money with a variable rate?

    This will depend on how soon and how much interest rates decrease. Currently, variable rates are higher than fixed rates, so to save money, you would need to see variable rates drop lower than fixed rates. However, the benefit of a variable rate is that you are not locked in, so when rates do fall, you will realize interest savings immediately compared to a fixed-rate mortgage, where you will need to ride out the remainder of the term. However, if you’re searching for payment relief, it’s best to look for an adjustable-rate mortgage, which will adjust payment with changes to your lender’s prime rate.

    How does inflation impact variable interest rates?

    Central banks will increase the policy interest rate when inflation increases or remains high. Banks will follow and increase their prime rate, used to price variable mortgage products. This is done to curb spending and borrowing to cool the economy and bring inflation back under control. 

    Central banks will decrease the policy interest rates when inflation decreases to stimulate the economy and encourage borrowing and spending. Banks will follow and decrease their prime rate.

    Final Thoughts: Making Informed Decisions About Variable Rates in Canada

    As homeowners and prospective buyers continue to navigate the Canadian mortgage market, the question of whether variable rates have peaked remains a hot topic. While experts may hold differing opinions, it’s clear that several factors influence variable rates, including inflation, monetary policy, and economic conditions.

    Whether you choose a variable-rate mortgage or explore alternative options, staying updated on market trends, evaluating your finances, and assessing your risk tolerance are all required to ensure you make the best financial decision. 

    While the future of variable rates in Canada may remain uncertain, being well-informed and prepared for any changes in market conditions will allow you to confidently navigate the ever-changing mortgage landscape. If you’re ready to start your mortgage journey, contact our experienced team of mortgage experts who can help you secure the best rate on your mortgage.