Canadian Mortgage Rates Bracing for a Gentle Descent Amidst US Market Sway

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Mortgage rates in Canada are finally starting to come down — but slowly. Even though the Bank of Canada is hinting at more rate cuts ahead, what happens in the U.S. is still playing a big role. High inflation and strong job numbers in the U.S. are keeping bond yields up, which affects how much Canadians pay on fixed-rate mortgages. So while there’s some relief on the horizon, it’s likely to be a slow and careful drop — not a big plunge.

Inflation Cools, but Shelter Costs Linger

Canada’s inflation dropped to 2.5% in July, the lowest rate since March 2021. While this is welcome news, the Bank of Canada (BoC) still faces complications in its rate decisions due to persistently high shelter costs. Despite making up just 29% of the Consumer Price Index (CPI), these costs are accelerating at 5.7%, driven by mortgage payments, rent, and other housing-related expenses.

This means that even as inflation cools, Canadians aren’t feeling much relief in their monthly budgets — especially if they’re carrying a mortgage.

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Fed’s Narrative for the American Public

Across the border, the US Federal Reserve is trying to thread a narrative needle. Despite markets rallying after Fed Chair Jerome Powell’s recent comments, the Fed hasn’t signalled any aggressive cuts. It’s clear that the days of near-zero interest rates are behind us.

While the bond market expects a potential recession (with 10-year yields dipping below 4%), stock markets remain bullish. Yet the Fed continues to suggest that interest rate cuts will be measured, not massive.

This disconnect between investor hope and central bank realism is keeping financial markets volatile — and Canada is feeling the aftershocks.

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The Fed’s Rate Cuts Overture

US bond and equity market optimism is bleeding into Canadian expectations. With the Fed hinting at cuts later this year, Canadian investors are anticipating a similar pivot from the BoC. Since Canadian mortgage rates, especially fixed rates, are heavily influenced by US bond yields, this narrative matters.

If the Fed follows through, the BoC may not be far behind. But it’s not just about policy; it’s about market sentiment, and right now, sentiment is cautiously optimistic about lower rates.

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US CPI Noise and Data

US inflation data remains a mixed bag. While some numbers show improvement, consumer goods deflation may soon plateau, which could reverse gains. The year-over-year US CPI dropped slightly from 3.1% to 2.9%, largely due to easing rental inflation, but core inflation still shows signs of stickiness.

Money markets are split: some expect 75 to 100 basis points of cuts by year-end. But as we’ve learned from the past two years, predicting central bank moves based on monthly CPI blips can be risky.

For Canadian borrowers, it means continued rate uncertainty.

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Mortgage Affordability in Canada

While inflation cools, mortgage stress remains high. Many homeowners are feeling the pinch as average mortgage amounts have climbed to $410,000, requiring larger down payments and longer savings timelines.

Credit card debt has surged, especially among mortgage holders, and more adult children are moving back in with their parents — both signs of growing financial strain. First-time buyers are particularly vulnerable.

We may be on the edge of a housing affordability correction. If rates drop and refinancing surges, the second half of 2024 could see shifts in demand, prices, and consumer behaviour.

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Variable Rates Offer a Tempting Gamble

With expected cuts from the BoC on the horizon, variable-rate mortgages (VRMs) are regaining attention. Though they typically start higher, borrowers could see payments drop if the BoC acts soon.

Those comfortable with some interest rate risk may find VRMs a strategic choice in this declining rate cycle.

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Fixed Rates Offer Short-Term Security

On the other hand, fixed-rate mortgages, especially short-term ones, offer predictability. Current 5-year fixed rates remain relatively low, and locking one in provides peace of mind.

Still, with potential BoC cuts and falling bond yields, shorter fixed terms (1-3 years) could offer the flexibility to refinance at lower rates later. Make sure to understand prepayment penalties if you plan to break your term.

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Final Thoughts for Borrowers

The Canadian mortgage market is walking a tightrope between cautious optimism and global headwinds. Whether you’re renewing or buying, timing and strategy matter more than ever.

• Watch for BoC policy updates and US inflation shifts
• Get pre-approved and consider rate locks, especially if you’re closing within 120 days
• Don’t just chase the lowest rate — think long-term affordability

A licensed expert can help you choose between fixed vs variable, and craft a mortgage plan that flexes with the market.

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Why Choose Mortgage.Expert

At Mortgage.Expert, we keep it real.

Our advisors are non-commissioned, salaried experts who only care about one thing: getting you the best deal for your needs. Whether you’re a first-time buyer or managing a renewal during economic uncertainty, we’ll help you cut through the confusion.

Call us today — and let’s turn today’s volatility into tomorrow’s opportunity.