As a Mortgage holder, it is crucial to understand the history of mortgage rates and how they are influenced. Mortgage rates play a significant role in determining the affordability of houses and the cost of borrowing. In this blog, we will highlight past rate trends from the Bank of Canada which may help you make the decision between a short-term vs long-term rate. The Cyclical Nature of the Bank of Canada Overnight Rate: The Bank of Canada adjusts the overnight rate, which influences the prime rate provided by mortgage lenders. On the Graph below you will see there has been 5 large increases in the last 45 years highlighted by the peaks circled in Green. On average, it takes approximately 29.4 months for mortgage rates to hit their peak once they start their increasing cycle. This peak rate typically lasts for around five months before the downward trend starts. After the rates start to decline, mortgage rates rapidly decline. It takes approximately 18.8 months for rates to drop to reach the next lows. In each of the previous rate cycles, the prime rate dropped by over 50% each time.
It is impossible to predict how rates will change in the future. Based on the past we can guess what may happen in the next couple of years. Many prospective homebuyers may choose shorter-term mortgages until the drop begins. This strategy allows them to take advantage of lower rates when they become available. This will save homeowners money in the long run but it is a risk due to the unknown length of mortgage rate increases. However, it's important to consider your financial circumstances when determining the most suitable mortgage term. Impact of the Bond Market on Variable Rates: While Variable rates are tied to the Bank of Canada overnight rate, fixed rates are influenced by the bond market. Homeowners opting for variable-rate mortgages should consider this timeline when making financing decisions. To see how the impact of rates were to be applied to this cycle, please watch the attached video.