A drop in the inflation rate can bring hope to borrowers, but the persistently high home prices, which significantly impact inflation, complicate the Bank of Canada’s interest rate decisions. Current trends from the US market and anticipated rate cuts by the US Federal Reserve add another layer of intricacy. This mix of domestic and global economic factors creates uncertainty for those considering their mortgage options. Canada’s mortgage market and recent shifts, particularly those resulting from last week’s Federal Open Market Committee (FOMC) meeting, have likely influenced expectations for rate cuts in Canada.

Inflation Cools, but Shelter Costs Linger Recent information reveals a positive trend: Canadian inflation fell to 2.5% in July, marking the lowest since March 2021. This broad decline in inflation rates suggests that the Bank of Canada (BoC) might rethink its previously “higher for longer” stance on interest rates. However, despite this optimism, shelter-related costs—including mortgage payments, heating, and property taxes—remain stubbornly high. Shelter inflation jumped to 5.7%, despite making up just under a third of the total CPI basket, showing just how outsized an impact housing costs have.

Fed’s Narrative for the American Public In the U.S., a conflicting economic narrative is unfolding. Bond markets are reacting as if a recession looms, with 10-year Treasury yields falling below 4%. Meanwhile, the Federal Reserve remains cautious, suggesting that while rate cuts are possible, they won’t be as aggressive as markets expect. The Fed is also trying to recalibrate expectations away from the zero-rate era. Despite job growth slowing and previous employment data being revised downward, inflation remains sticky around the 3% mark. These dynamics are critical for Canada, given how closely linked our bond markets and inflation expectations are to the U.S.

The Fed’s Rate Cuts Overture The Fed’s hints at rate cuts have injected volatility into global markets, and Canadian mortgage borrowers are feeling it. As bond yields shift in response to Powell’s comments, Canadian fixed mortgage rates shift too. Investors are increasingly betting on rate cuts in both countries, but the Fed’s hesitancy introduces risk. In Canada, many anticipate the BoC will act first, but if U.S. inflation remains sticky, any gains in affordability could be short-lived.

US CPI Noise and Data American inflation data is giving mixed signals. While some monthly readings suggest easing pressure, year-over-year CPI still hovers near 3%. Seasonal distortions and slowing rental inflation help, but price pressures in consumer goods and services haven’t disappeared. If inflation holds at this level, markets expecting 75-100 bps in cuts by year-end could be disappointed—with implications for Canadian rates, too.

Mortgage Affordability in Canada Canadian home prices remain elevated. While some softening is expected, affordability remains a concern. The average mortgage amount has hit $410,000, pushing downpayment and qualification requirements higher. Many homeowners are facing renewal shock, and younger buyers are struggling to enter the market. Credit card debt has reached highs not seen since 2007, a clear sign of financial stress.

If BoC rate cuts arrive as forecasted, refinancing activity could rise sharply. But until then, fixed-rate mortgages are holding steady, and borrowers are feeling the pinch. New mortgage originations are up slightly but remain below pre-pandemic norms, suggesting pent-up demand may be released in 2025.

Variable Rates Offer a Tempting Gamble As forecasts point to lower rates, variable-rate mortgages (VRMs) become more attractive. Borrowers willing to stomach some volatility could benefit from falling BoC rates over time. This option is becoming increasingly viable for buyers confident in rate cuts materializing later in 2024.

Fixed Rates Offer Short-Term Security Fixed rates offer peace of mind and budgeting certainty. With 5-year fixed rates currently below 5%, they remain popular, but shorter-term fixed mortgages may offer the best of both worlds—near-term stability with the chance to reset into a lower rate environment a few years down the line. That said, prepayment penalties and fine print matter more than ever, especially if rate trends reverse.

To better understand where rates might be heading, it’s worth exploring how Canadian mortgage rates have behaved over the past few decades. The historical context reveals key trends that often repeat during economic shifts like the one we’re in now.

In Conclusion Canada’s mortgage landscape is in flux. U.S. market movements, sticky inflation, and cautious central banks mean borrowers need to be strategic. Whether you choose a fixed or variable rate, reviewing your mortgage terms and staying informed will help you navigate this unpredictable terrain.

For tailored advice, speak to a nesto mortgage expert. With rates likely to shift again in the months ahead, locking in the right strategy now could save you thousands down the line.