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Robert McLister: When it comes to mortgage shopping, flexibility is not just a yoga result, but a financial survival strategy
Published on December 20, 2024 • Last updated 2 days ago • 4 minutes reading time
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If mortgage rates trend sideways in early 2025, the housing market will be less buoyant than expected in the spring, writes Robert McLister. Photo by Gene J. Puskar/AP Files
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So about the falling mortgage interest rates.
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The US Federal Reserve made things interesting on Wednesday. As expected, it lowered its key interest rate, but at the same time signaled that future easing was very questionable.
That's a problem for low-fare lovers everywhere, including Canada. This is because there is a strong correlation between US and Canadian interest rates, bond yields and mortgage rates, and US yields have risen sharply.
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Of course, many are quick to point out that new President Donald Trump's tariff threats, if followed through, could send Canada's economy spiraling. And that's true.
However, as has been widely noted, those same tariffs would shoot Trump in his own foot, and he knows it. And Canada is already meeting their demands by investing $1.3 billion in our border security – which the future president of course recognizes.
As a result, we may not get tough tariffs, or they could trigger stagflation and eventually interest rate hikes. Whatever the case, the current lowest fixed interest rates – they are around four percent – could potentially lead to a species threatened with extinction in the coming months.
For now, we'll have to wait until Trump takes office on January 20 to find out what he has in store for us. Meanwhile, now is not the time to bet on further falling interest rates. Given the economic momentum and statistical base effects, there is a good chance we will see little to no progress on inflation in the next CPI reports.
If you look at a chart, the five-year US bond yield, which typically exceeds the five-year Canadian bond yield, is already breaking its downward trend line. Our government bonds might not be far behind. Important point: Given the connection between returns and fixed mortgage rates, make sure you maintain the rate for the long term if you are planning a new mortgage for your future before mid-April. A rate lock-in comes with no obligation and guarantees that your interest rate will not increase as long as you qualify for the mortgage and close before the deadline.
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When it comes to mortgage shopping, flexibility is not just a yoga result, but a financial survival strategy. Therefore, the longer your rate guarantee, the better. If all else is equal and you want interest rate protection for as long as possible, you could consider lenders such as BMO and Nesto, for example. They are 130 and 150 days respectively, compared to the standard limit of 120 days.
House Price Roulette
All of this interest rate uncertainty is casting a long shadow over real estate forecasts. However, this much is clear: If interest rates trend sideways in early 2025, the real estate market will be less buoyant than expected in the spring.
But real estate depends on more than just prices. The development of the housing market in 2025 depends, among other things, on the following:
- How much impact do US tariffs have? our growth
- How many people are rushing to borrow thanks to recent mortgage policy changes?
- Some fear whether inflation has reached its lowest point
- How quickly Ottawa closes the tap on population growth
Anyone who claims precise foresight in this economic jungle is selling snake oil in a designer bottle.
About those 30 year mortgages
In other news, the Liberals' fall economic statement promised to launch “consultations on long-term mortgage market developments in Canada.” For some, this sparked the fantasy that US-style 30-year terms would be introduced.
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But while the security of three-decade mortgage rates sounds tempting, they are largely smoke and mirrors at this point. This is true for numerous reasons – the most important are three:
First, 30-year interest rates in the US are so low because Americans have a large securitization pool with low-cost financing. This pool took half a century to build. If I were to bet, I'd say there won't be a liquid, low-cost, 30-year securitization pool in Canada in the next decade – but I'd like to be wrong.
Second, even if the government introduced a competitive securitization mechanism (which is unlikely any time soon), 30-year mortgage rates would not look good compared to five-year mortgage rates. Today, traditional 30-year rates are about 230 basis points higher than Canadian five-year rates. That amounts to more than $11,000 in interest in the first five years alone – for every $100,000 borrowed.
And finally, unless there are unforeseen changes to the law, people who want to get out of 30-year mortgages in the first five years would have to pay horrendous early repayment penalties for the exit. This is due to the way interest differential penalties are calculated in this country.
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Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
Mortgage interest rates
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