What’s next for mortgage rates?

Last month, the Bank of Canada held its benchmark interest rate steady at 5 per cent for the sixth consecutive time. But many experts (including all six of the Big Banks) are predicting that interest rates could start to come down as soon as this summer or fall.

Given that a change of even a few percentage points can make a difference in the hundreds or even thousands of dollars for Canadians’ monthly mortgage payments, both homeowners and buyers are understandably eager to find out which direction interest rates will be headed next.

While no one can be completely certain, the signs do seem to be pointing towards one clear answer that could have a big impact on the housing market in every part of the country.

Who is the Bank of Canada, and why are they so important?

But first things first: what is the Bank of Canada, and why do they have such a huge say in deciding how much your mortgage will cost?

The Bank of Canada is the Crown corporation that’s responsible for setting Canada’s monetary policy and keeping our financial system safe and sound. Their main job is to control inflation by using interest rates to either speed up or slow down the economy.

Lower interest rates make it easier for businesses and consumers to borrow and spend money, which tends to increase the rate of inflation and the prices of goods and services. Higher interest rates, on the other hand, translate into consumers and businesses tightening their purse strings, thereby lowering price increases and slowing inflation.

A brief history of interest rates

For many younger Canadians, up until recently, a low-rate interest environment was probably the only kind of economic environment they’ve ever known. Thanks to decades of low inflation, the Bank of Canada held interest rates at near-record lows for a similarly long period of time.

For the past three years, however, inflation in Canada (and much of the world) has been rising by leaps and bounds. In the spring of 2021, inflation in Canada hit a high of more than 8 per cent. That’s four times the Bank of Canada’s target annual inflation rate of 2 per cent.

The reasons behind this increase ranged from the after-effects of the COVID-19 pandemic to Russia’s invasion of Ukraine. But for the average Canadian, the biggest impact was on the cost of housing.

To try to rein inflation in, the Bank of Canada raised its interest rate 10 times over the course of the next year or so, bringing it from 0.25 per cent in March 2022 to 5 per cent in July 2023. Those increases had a direct effect on both mortgage rates, and the cost most Canadians had to pay for housing each month.

What’s next?

While the cost of all those rate hikes has been painful, the good news is, it actually seems to be working. While many goods and services still cost more than most of us would like, the rate of inflation has started to come down. And even the Bank of Canada governor, Tiff Macklem, has said “we are getting closer” to seeing interest rates decrease once again.

When they do, the result could be huge for both homeowners and buyers alike. For owners, lower interest rates would mean that the next time you renew your mortgage, your monthly payments will likely be a lot lower than they are now. Lower rates could also fuel a surge in demand, which might mean higher property values.

For buyers and investors, the prospect of lower mortgage payments will determine things like how large or expensive a home you can afford. For first-time buyers especially, it could also make the difference between whether or not they can get into the housing market at all.

Of course, any number of things could change between now and then, and only time will really tell. But if the signs are right, the majority of homeowners and buyers could be in for some much-needed financial good news sooner rather than later.