Although it might feel like interest rates in 2023 are unbelievably high, they’ve been much higher before. The last time a 5-year fixed mortgage was higher than today’s 6.79% was in November 2008 when the 5-year fixed mortgage rate was at 7.20%. Before that, the 5-year fixed mortgage rate reached above 7% at least once every year from 1973 to 2002, notably peaking in September 1981 at a whopping 21.75%.
With inflation still not at the Bank of Canada’s target of 2%, many prospective and current homeowners might be wondering how high interest rates can go. That answer depends on several factors, including the unemployment rate, global economic conditions, inflation, and wages.

Inflation on The Rise Again in July

Inflation started rising in 2021, the result of increased unemployment, a shift in pandemic spending and supply-chain shortages, and pushed inflation to a high of 8.1% in June 2022.

According to a survey done by Statistics Canada, the top 3 areas most affected by rising prices in 2022 were food, transportation, and housing. Record-high home prices kept many homebuyers on the sidelines for most of 2022 and only in the beginning of 2023 did many of those buyers start to gain confidence to re-enter the market.

But with the inconsistency of inflation heading downwards and more rate hikes a possibility from the Bank of Canada, the Canadian Real Estate Association noted in July that some buyers may head “back to the sidelines”. Inflation dropped from 3.4% in May to 2.8% in June which brought hope that inflation was slowing down, however, that hope was thwarted when inflation rose again in July to 3.3%. Now, many experts predict the Bank of Canada will once again hike interest rates in their September 6th announcement.

Inflation’s Impact on Mortgage Rates

While we are currently nowhere near the highest mortgage rates Canada has seen, we are not that far away from the lowest. From March 2020 until March 2022 the overnight lending rate was at a historic low of just 0.25%, and at the same time, the prime rate was at 2.45%. Since then the prime rate has increased by almost 200% to 7.20% in August 2023.

The good news is that inflation is down from its peak of 8.1% in June 2022, meaning efforts to move inflation in the right direction have been working. Home affordability, on the other hand, has been climbing in the opposite direction and has worsened with higher interest rates.

Variable-rate mortgage holders in particular are facing higher monthly payments with each interest rate hike. According to Ratehub.ca, variable mortgage rates are in the range of 5.95% – 6.10% today, a significant increase from lows seen just three years ago. In the long term, however, when interest rates eventually go down, variable-rate holders will benefit from lower monthly mortgage payments.

When will Rates Go Down?

The need for elevated rates may persist longer than many people hoped, especially as it takes several months for a single interest rate hike to have its full effect on the economy. Until the Bank of Canada can get inflation closer to its 2% goal, the possibility of further rate hikes remains. Looking at the big picture, inflation is generally trending downward and many expect interest rates to decrease in 2024. It’s unlikely that rates will go down as low as they were during the pandemic, but some relief may be coming.
If you’re a prospective homebuyer wanting to enter the market but worried about soaring monthly payments, you don’t need to wait until 2024 to do so. With a 3-year or 5-year fixed rate, you can lock in a guaranteed rate that won’t fluctuate with rising inflation.

The difference between a 3-year and 5-year fixed rate could be hundreds of dollars in savings a year. A homeowner who bought a home at the July national average of $757,300 and put 20% down with a 3-year fixed rate of 5.99% amortized over 25 years has a monthly mortgage payment of $3,873.

Compared to a homeowner who bought a home at the same price, $757,300, and put 20% down with a 5-year fixed rate of 5.74% amortized over 25 years has a monthly payment of $3,783 – nearly $100 less a month than someone on a 3-year fixed rate.

Navigating The Upward Climb : Understanding The Current Mortgage Rate Outlook by MacKenzie Scibetta | zoocasa