Why fixed rates haven’t dropped that much yet

Everything is playing out as expected.  Fixed rates have begun to fall, slowly.  But this isn’t unusual or unexpected.  If you’ve followed interest rate hikes and cuts, you’ll see a familiar pattern.  

When the cost of funds goes up, interest rates go up almost immediately, usually within a day or two. When the cost of funds goes down, it can take upwards of 3 weeks for rates to come down.  It’s the same with gasoline prices.  You hear in the news that oil prices have gone up and almost immediately, that increase is reflected at the pump.   When oil prices fall, it can take 3 to 5 days for the cuts to be reflected at the pumps.  That’s just the way it is.

A little more insight…

In case you didn’t know, there are 2 things that directly affect mortgage rates..

VARIABLE RATE MORTGAGES..

The Bank of Canada rates will directly affect your Variable rate.  When the Bank of Canada cut the rate on June 5th, the Bank Prime rate went down by the next day.  

FIXED RATE MORTGAGES..

Fixed rates are priced directly with the Govt of Canada Bond yields.  And the bond yields have dropped like a rock..  the 5 year bond yield had fallen 0.60% from May 28 to June 17.. (remember, the banks haven’t cut the rates by this much as they are very slow to reduce rates)

But since then they have increased by 0.20%.  Why?  Due in part to positive economic news in the US and also due to the higher Federal Govt spending (Trudeau) in Canada… The Canadian govt spending has gone off the charts and this is making institutional investors very nervous and pessimistic that inflation may not get fully under control..

MY BOTTOM LINE..

I think we will see the Bank of Canada continue to cut rates.  The forecast by many respected Economists is for another 2.00% cut by the end of 2025.   And we need it.. Watch for rates to fall. 

Real estate values always weaken during the summer months. They typically fall by 5%… I think we could see a 10% drop and perhaps even greater due to the flood of properties that have come to the market in recent months … caused in  large part by the Federal govt’s new Capital Gains Tax increase… People were rushing to sell their rental properties and cottages by June 25 so they could pay capital gains on 50% of the profit instead of 66% of the profit.

Opportunity...It’s a good time to buy in my opinion..  falling prices, falling interest rates (look at variable rate mortgages if you want to enjoy the falling rates immediately).. 

And of course, call me anytime if you want to talk.

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca