This is the time of year when everyone in the real estate world makes bold predictions of what the road ahead looks like for 2022. What are the interest rate projections for those looking to get into the housing market for the first time, and of course, for those who already have a mortgage that will soon be up for renewal? Will the road ahead be riddled with a few potholes or a smoothed paved surface?
While some of the highest-profile economists make their forecasts this month, it’s important to keep in mind that it’s a lot like getting in a vehicle and embarking on a road trip with only a general destination in mind. After a few unplanned stops and perhaps a few wrong turns, you actually wind up arriving somewhere else that’s nowhere close to the anticipated itinerary when you departed.
So while these titans of the financial industry have done their best to research economic cycles, collect data, analyze a variety of mathematical models, and then present their findings in various charts and graphs, it’s also important to understand that they are human and have shared their insights with the best of intentions to help all of us understand what may occur to further guide us in making the best decisions for our financial future and ultimately arrive at our intended destination safely and unharmed. So before we look ahead let’s start off by looking at what occurred this past year (2021). There’s lots of great information to follow so stay with us until the end and we promise to give you our best guesses as to where there is the potential for opportunity and what may happen this year.
Interesting Fact: Home Sales Smash Records: There were 667,000 home sales nationally in 2021, which smashed the prior record by over 20%. With such a supply-demand imbalance at play, it’s perhaps no surprise that house prices continue to hit new records with the MLS House Price Index up an unprecedented 26% in the last year alone. It was truly an exceptional year for Canadian real estate
Now, how about mortgage interest rates? Glad you asked.
Fixed Rates in the rearview mirror: In January 2021, 5-year fixed rates were hovering around 1.74% (that’s a 1.31% spread from the bond yields) and they ended the year around 2.69% (which is a 1.28% spread).
If you don’t know exactly what a bond yield is, don’t worry, you’re not alone. Many of the people that contact us for help with their mortgage are unclear unless they perform a quick google search or have read one of our recent blogs “Are Fixed Rates Skyrocketing” which also dives into this subject.
Now travel back in time with us to January 1, 2012, the highest we’ve seen the bond yields reach was 2.491% and the lowest was 0.238%. If we were to assume the bond yields go up to 2% this year, it’s reasonable to expect we’ll see 5-year fixed rates increase to be somewhere between 3.00%-3.50%. Recent history has shown us that 5-year fixed mortgage rates have hovered between 2.50% – 3.50%. We’ve seen cycles where rates are under 2.50% and above 3.50%. It’s likely that as our economy continues to rebound from the damage inflicted during the early days of the pandemic and with energy prices looking very strong, there’s plenty of reason to think this trend will continue and we’ll very likely see bond yields continue rising prompting fixed rates to go up.
Variable Rates in the rearview mirror: Variable rates are represented as a prime minus or prime plus a certain percentage. When looking at available rates nationally from most major lenders, variable rates started the year with a prime rate of 2.45% and the available published rates were prime -.80% (which equated to an interest rate of 1.65%).
By the end of 2021, most lenders were offering prime -1.20% (which equated to an interest rate of 1.25%), and some promotional offerings as low as prime -1.50% prompting the highly advertised sub 1% interest rates on a 5-year variable rate mortgage.
There were some great offers for fixed mortgage rates in Q1 & Q2 of 2021 but when bond yields rose and fixed rates followed suit, the gap between fixed and variable rates also rose drastically. This change prompted many borrowers to opt for the historically more favourable option of a variable rate in Q3 & Q4 of 2021, because the risk was reduced as the spread grew.
What to expect in 2022: Drum roll, please.
The anticipation with many economists is that we’ll see two to three prime rate hikes in 2022 beginning with the first one on January 26th, when the Bank of Canada makes its interest rate announcement and releases the much anticipated Monetary Policy Report. The 5-year Government of Canada bond yield is back to pre-COVID levels, exerting upward pressure on fixed mortgage rates as well. Subsequently, we could see both fixed and variable rates increase at the same time. If the prime rate went back up to pre-pandemic levels (3.95%), the prime -1.00% interest rate would end up being 2.95%. It’s not unreasonable to see the prime rate go back up to 3.95% sometime before the end of 2024 if we project three increases of .25% in 2022 and three more in 2023.
While the current spreads on variable rate products are high, the moment the prime rate goes up, those spreads are likely to shrink, and being able to lock in at a rate of around 2.50%-3.00% might look like a really great bargain in the not too distant future. Keep in mind that a lot can happen in 5 years and we could easily see sub 2.50% rates sometime between now and 2027 as well depending on various factors like housing inventory, energy prices, and unemployment to name a few.
Benchmark Mortgages Summary:
- If you sleep better at night knowing your mortgage payment won’t change for the next 5 years, then opting for a fixed term is still a fairly safe bet if you’re looking at a rate near 3 percent. One of the most important factors to consider when choosing a lender for that fixed rate will be knowing they calculate penalties should you need to break the contract prematurely. This could be the difference between a lender charging penalties in the tens of thousands compared to another charging much less. For more on this, be sure to watch our short video and read one of our recent articles “Avoiding Mortgage Handcuffs.”
- If you feel like rolling the dice a little and riding the wave of low rates that are currently available and want to save initially while your mortgage balance is higher, the variable rate option currently looks like the better option even when factoring in several prime rate increases that will surely follow. Some mortgage lenders will actually let you take a variable rate where you can choose to have your payments stay the same even when the prime rate increase which can be a nice option when the goal is managing cash flow.
- If you’re planning on buying a home in 2022, you’ll want to secure a rate hold as soon as possible to protect yourself from rising rates. If you already have a super low mortgage rate and are looking at moving later this year or next, be sure to look into portability options with your lender or licensed mortgage broker.
- If you have a mortgage coming due for renewal in the next 12 – 18 months (fixed or variable) and are at all concerned about where rates could be headed, now would be a good time to look into redoing your mortgage as it’s quite possible your penalty is low enough that a new lender would allow you to absorb the penalty into the mortgage. You might not save enough in interest between now and the end of your term to recoup the full penalty between now and your renewal date but if you look at the big picture and anticipate rates continuing to rise, the savings in interest over the next 5 years could easily end up being several thousands of dollars.
The road trip is just a metaphor for many things in life. There is always something in the rearview mirror behind us, but the road ahead, the one not yet traveled, can hold both adventure and surprises. If you want to have a professional take a look at your existing mortgage or look into getting you preapproved for a new mortgage, book a call with one of our licensed brokers and we will try to shed as much light as we can on if there are any opportunities available to you now.
Should we talk? Yes for sure. You’ll want to make sure that you are taking advantage of the latest insights on our evolving market conditions. Let’s provide you additional information about Alberta’s economy and other projections that may impact your mortgage options so you can have complete confidence in the months and years ahead. We have access to a wide range of lenders and know the right questions to ask to assess your situation and make sure you have the best mortgage strategy.
Source: Mortgage Professionals Canada
Source: Bank of Canada
We establish meaningful long-term relationships with clients and help them achieve financial freedom faster with diverse and customized mortgage options. The term “benchmark” originates from the chiseled horizontal marks that surveyors made in stone structures as an established point of reference.
About Mortgage Professionals Canada
Mortgage Professionals Canada is a non-profit, national mortgage industry association representing 11,500 individuals and 1,000 companies, including mortgage brokerages, lenders, insurers, and industry service providers. Our members make up the largest and most respected network of mortgage professionals in the country.