The Canada Mortgage and Housing Corporation (CMHC) estimates that 2.2 million mortgages will face an interest rate shock in 2024 and 2025. “This is the first time in more than 40 years that rates are rising to this level so quickly,” recalls Tania Bourassa-Ochoa, Senior Specialist, Housing Research at CMHC.
In the field, Sophie Gélinas, broker at Dominion Mortgage Centers, indicates that 8% of her clients will have to renegotiate their mortgage loan before the end of the summer and that an additional 6% must be added before the end of the year. In 2025, 34% of its customers will also have to do this. Maxime Fortin, of Momentum Mortgage Firm, estimates that around 35% of his clients will have to renegotiate their mortgage loan during the next 12 months.
A weaker economy
Many interest rate experts’ predictions are that the Bank of Canada will begin lowering its key rate by 0.25% in June and continue to do so until it reaches 2.5%. , a reduction by half of the current rate of 5%.
PHOTO FRANÇOIS ROY, LA PRESSE ARCHIVES
The Bank of Canada is walking on eggshells when it comes to lowering its rates.
The negative yield curve, or the fact that short-term rates are higher than long-term rates, supports the idea that economic growth will be lower in 2024, explains Lorenzo Tessier Moreau, economist, Desjardins, Economic Studies. This will encourage the central bank to lower its key rate, which will approach the neutral rate of 2.5% by mid-2025, just in time to deal with the largest share of mortgage refinancing.
Will rate cut predictions come true?
However, the forecasts for rate cuts at the start of the year are very similar to those at the start of last year, recalls Mathieu Lachance, manager of the Canadian Absolute Return Sovereign Bond Fund at Gestion Cristallin. But rates have not fallen. “We have been postponing the start of rate cuts for a year,” he said. According to him, we could very well see only three rate cuts by the Bank of Canada between now and the end of the year, which would bring the key rate down to 4.25%.
Certain economic indicators are not weakening as quickly as one might have thought, so much so that the Bank of Canada currently finds itself facing the risk of relaxing its monetary restrictions too quickly and restarting the inflationary spiral.
Furthermore, rate increases as rapid as those we have experienced over the last two years can only have a heavy impact on the economy, so we must not rule out the risk of a possible hard landing in the economy. economy, or even that it falls into recession, estimates Mathieu Lachance. “And if that proves true, then interest rates would fall quickly,” he says.
PHOTO DAVID BOILY, LA PRESSE ARCHIVES
The lack of housing will ensure that demand will remain strong. A drop in rates of 1.5% or more could cause an overbidding effect.
What to do then?
Currently, the best 5-year mortgage rates are between 4.80% and 5.00% compared to the 1-year rate which is around 6.60%. Maxime Fortin is one of those who believe that the Bank of Canada’s rate cuts will be very gradual. The lack of housing will ensure that demand will remain strong. A rate cut of 1.5% or more would risk causing an overbidding effect, which justifies a certain patience on the part of the central bank, according to him. Consequently, a fixed mortgage rate for 5 years below 5% constitutes a very attractive offer currently, he believes.
Sophie Gélinas suggests a different approach which could prove interesting in the event of a significant drop in rates. She would opt for a 5-year variable rate term. This rate is currently at 6.25%, i.e. the banks’ prime rate minus 95 basis points (one basis point = 0.01%), a rate that it considers advantageous, which can then be converted into a fixed rate for the remainder of the term when rates have fallen sufficiently. The gain will be very interesting if the drop in rates occurs quickly. But this is aimed at those who would be comfortable with such a strategy, she adds.