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Shopping for mortgage rates? Watch the US – national elections

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Despite the Bank of Canada’s significant interest rate cut last week, experts who spoke to Global News say Canadians should not expect a further discount on fixed mortgage interest rates.

In fact, moves south of the border — a strong U.S. economy and a looming presidential election — could have a greater impact on the prices Canadian homeowners and potential buyers can secure in the market.

The Bank of Canada accelerated its interest rate easing cycle last week with a half-percentage-point cut, bringing the interest rate down to 3.75 per cent.


Click to play the video:


The Bank of Canada cuts its key interest rate by 50 basis points in a large-scale move


But cuts of this magnitude have not been reflected in the bond market lately, an important indicator for fixed-rate mortgages. Instead, yields are higher on five-year Government of Canada (GoC) bonds, which lenders use to price the rates they offer on the popular five-year fixed mortgage.

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The yield on five-year Canadian government bonds reached 2.65 per cent in mid-September, its lowest level in more than two years, but has since risen again to above 3 per cent.

Bond market pricing is intended to reflect expectations of the Bank of Canada’s interest rate path, and not necessarily a direct response to increases or cuts from the central bank itself. This means that communications from the Bank of Canada as well as data on inflation and the Canadian economy can change bond yields and, in turn, mortgage rates.

Fixed mortgage rates have fallen considerably in the Canadian market over the past six months as the Bank of Canada cut rates and signaled more cuts are coming, according to Penelope Graham, a mortgage expert at comparison site Ratehub.ca.


Graham says recent data showing inflation has returned to the central bank’s 2 per cent target, and fell further in September, has given bond investors increased confidence that interest rates will fall.

“We’ve entered this new rate-cutting cycle. So bond investors have been very reactive and receptive to that,” she says.

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Robert Kavcic, chief economist at BMO Capital Markets, tells Global News that the entire bond market was already priced in at a 50 basis point discount from last week, so there was no surprise of the larger-than-usual move.

BMO expects the Bank of Canada to continue to chart a lower interest rate path through a series of 25 basis point rate cuts until the middle of next year. If the central bank cuts at around this pace, there won’t be much movement in the bond market, which is already pricing in lower interest rates.

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Because the bond market rationalizes fixed-rate mortgages, homeowners and buyers shouldn’t expect interest rates to fall much further, barring any big surprises in the economy, Kavcic says.

“In other words, this could be very close to the lows we see for three- and five-year fixed mortgage rates,” he says.

How do the US elections affect mortgages?

The Bank of Canada’s big move that’s already been priced in may explain why the bond market isn’t falling, but to explain why yields are rising, Kavcic looks to the U.S.

As of last Wednesday, the US economy had consistently posted economic results that outperformed its global counterparts, weakening long-held expectations of a decline in American power. This in turn has dampened calls for the pace of interest rate cuts from the US Federal Reserve, which began its easing cycle only last month.

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Kavcic says strong U.S. economic performance has pushed up Treasury yields south of the border, and that Canadian bonds have been “affected” by those moves.

Then there are the US elections. With opinion polls showing a very intense competition for the White House between US Vice President Kamala Harris and former President Donald Trump, Kavcic says that the bond market has begun to reflect the possibility of Trump’s second term.

Trump’s economic proposals include sweeping tariffs that experts warn could lead to higher inflation on both sides of the border. This also puts upward pressure on bond yields, Kavcic explains.

He points out that there are some factors that could push bond yields in Canada lower.

The health of Canada’s economy has become increasingly important to the central bank amid confidence that inflation is back under control, so signs of weakness could accelerate the pace of interest rate cuts in the future.


Click to play the video:


Mortgage expert on what a half-point interest rate cut would mean for borrowers


Kavcic adds that the “neutral rate” place has not been settled — a lower landing point for the Bank of Canada interest rate could force five-year bonds to settle lower than they are today, for example.

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But Kavcic says these additional shifts may end up being swallowed up in bond market prices until the US election dust settles.

“Some of these minute details get lost in the bigger picture,” he says.

Graham says she sees room for fixed mortgage rates to fall slightly as more certainty emerges about the pace of cuts at the Bank of Canada.

But she adds that she has noticed a growing popularity in variable-rate mortgages among Canadians, which respond directly to the Bank of Canada’s interest rate movements.

Graham says variable interest rates are still higher than most fixed alternatives, but Canadians who are comfortable with a little risk may find they will get a better interest rate in the long term as long as central bank rate cuts continue as widely expected.

Graham says anyone shopping for a mortgage interest rate in today’s market should ensure the interest rate is locked in before the US election. She notes that whichever way the bond market changes in the wake of the vote, locking in the interest rate for up to 120 days could ensure a homebuyer gets the lowest possible rate in the near term.

“This removes a little bit of the uncertainty for you as a borrower,” Graham says.


Click to play the video:


Political analyst about the countdown to the US presidential elections


&Copy 2024 Global News, a division of Corus Entertainment Inc.



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