The Bank of Canada overnight rate started 2023 at 4.25% and finished the year at 5%. Ted Rechtshaffen, president, portfolio manager and financial planner at TriDelta Private Wealth believes there will be a 2% decline in rates by the end of 2024, back to an overnight rate of 3%. The impacts of this decline will be the story of 2024.

These predictions are based on a combination of factors, including the negative direction of the Canadian economy, Canada’s interdependency with other central banks, specifically in the United States and European Union, and how the Bank of Canada has historically made rate moves. It is generally slow to make a change in direction, often starting changes later than it should have (in hindsight), but it tends to move quickly once it finally makes that shift.

The speed at which rates went up is certainly a factor on the speed at which they will then come down. Having said that, we are not returning to the super-low interest rate world that we found ourselves in during 2020 and 2021.

It is important to remember that overnight rates are only part of the interest rate equation. The five-year Canadian bond yield has had a much different path than overnight rates in 2023. These rates move with the market and they tend to move in advance of expected activity.

The five-year Canadian bond yield started 2023 at 3.42% per cent and was 3.27% as of mid-December. Of course, there has been a lot of movement along the way. It hit a low of 2.65% in March and a high of 4.45% in early October. Those are significant shifts, but we expect much less volatility in 2024.

What will the rate changes mean for mortgages?
Mortgages can be broken into three categories: variable rate, three-year fixed rate (very popular at the moment) and five-year fixed rate. This article will use standard market rates for uninsured mortgages, but there are usually better rates available through special deals and smaller lenders.

At the end of December 2023, a home equity line of credit at prime is 7.2%. If rates drop 2%, the rate will be 5.2% at the end of 2024. Still higher than the incredibly low rates of 2021, but a meaningful relief for those with debts.

It is easiest to see the impact on variable-rate mortgages, which have two levers. The first is directly tied to overnight bank rates and would also drop from a decline in those rates. If a five-year variable-rate mortgage in December 2023 at a big bank is prime minus 0.2%, the rate is 7%. Therefore, a decline of 2% in the overnight rate will lower it to 5%.

But that isn’t the end of the story. Terms can drop as low as prime minus 1% when things are going great. Rechtshaffen’s expectation is that bank rates will decline, and the “minus” part of the mortgage rate will also improve. If it moved to prime minus 0.5% from the big banks, the rate in a year would be something closer to 4.7%.

A three-year fixed-rate mortgage was around 6.35% at the end of December 2023. The three-year Canada bond yield was 3.74%. The spread between those numbers is 2.61% which is quite wide historically. Over the past year, the three-year bond yield has ranged from a low of 3.03% to 4.82% and 3.74% is a long way off 4.82%.

Rechtshaffen is not certain that the three-year bond yield will be that much lower at the end of 2024, maybe 3.25%, but mortgage rates should come down as the spread with the bond yield gets smaller. Perhaps, the three-year mortgage rates will be closer to 5.25% by year-end 2024.

As for five-year fixed rates, the rate in December was around 6.2%. The five-year Canada bond yield was 3.23%. The spread between those numbers is 2.97%, very wide historically. Over 2023, the five-year bond yield has ranged from a low of 2.65% to 4.45%, so 3.23% is a long way off 4.45%.

The five-year bond yield may not come down at all by the end of 2024. This would make sense if the yield curve returned to normal, meaning a lower yield for overnight rates and a rising yield as the term gets longer. Again, five-year mortgage rates should still come down as the spread gets smaller.

Perhaps, we will see five-year mortgage rates closer to 5% by the end of 2024, especially since these rates are the most competitive term and will once again become more popular than two- or three-year terms.

In summary, Rechtshaffen expects to see five-year variable rate mortgages coming down 2.3% over 2024, three-year fixed-rate mortgages dropping by 1.1% and five-year fixed-rate mortgages falling 1.2% by the end of 2024.

Source: Financial Post