Mortgage rates are influenced by several factors, the foundation of which is the overall state of the economy. When the economy is doing well and moving fast, rates are typically higher. When the economy is sluggish, rates are usually lower. Seem backward? Here’s why it works that way:
Many people think that the Bank of Canada (BoC) sets mortgage rates, but that’s not quite true. The BoC sets the policy interest rate, also known as the overnight rate. Then, Canadian banks adjust their prime lending rate accordingly. The prime rate is used as a benchmark by all major Canadian banks to set interest rates, including mortgage rates. While the overnight and prime rates are separate, Canadian lenders usually adjust their prime rates within a few days of BoC overnight rate changes. This is because a higher overnight rate means higher borrowing costs for banks. They raise interest rates to cover their own costs.
So why does the BoC ever raise rates? Everyone likes a lower interest rate—right? The Bank of Canada follows an inflation-control target that guides its decisions. This target is set by the Bank and the federal government and reviewed every five years. The Bank’s objective is “to preserve the value of money by keeping inflation low, stable and predictable” (BoC, 2023).
When the economy is slow—like it was during the initial COVID-19 crisis—the BoC lowers its rates to increase cash flow and encourage consumer spending. But when the economy is doing well and moving fast, borrowing, consumer spending, and demand are all elevated—which can cause inflation. A major problem with inflation is when prices rise at a rate with which salaries don’t keep pace, people suddenly can’t afford to buy things, and the economy grinds to a halt. For that reason, when the economy is moving too quickly, and inflation is growing unsustainably, the BoC increases the overnight rate to constrict cash flow.
Now that we know why rates are so high, we can make an educated guess about their future. Many experts suggest that 2023 will see a slowdown in the Canadian economy due in part to the BoC’s recent policy rate increases, high costs of living, and reduced household spending. But does that mean mortgage rates will go down in 2023?
Here are the detailed answers from top industry experts:
Analysts at Altura Financial predict that 3 and 5-year fixed rates will trend generally lower throughout 2023. According to the Canadian broker, “it’s not a matter of if, but when, there is another downturn for fixed rates, but it could take well into Spring 2023 before we see this.”
As for variable rates, Altura predicts a “stabilization” in late 2023 or early 2024. For those who don’t want the risk of a variable rate, the broker suggests looking into a 3-year fixed rate. When it comes time to renew in 2026, rates will likely be down by 1% or more.
BCREA’s Chief Economist, Brendon Ogmundson, predicts that 5-year fixed rates have likely peaked at their December 2022 average of 5.5%. He expects the average to begin declining in early 2023, ending the year closer to 5%. Ogmundson also writes that variable rates will rise to 6.35% before decreasing in late 2023, in line with the Bank of Canada’s anticipated policy rate changes.
He explains, "we could see a significant downward trajectory for inflation in 2023, which would provide the Bank with the necessary support to begin lowering its policy rate.”
Economists at RBC are less optimistic, predicting that higher interest rates will continue to be a challenge for potential buyers throughout 2023—and possibly beyond.
True North Mortgage’s CEO, Dan Eisner, explains that mortgage rate predictions will ultimately depend on the BoC’s rate-hike campaign. He writes that if the Bank does rest its rate-hike campaign, fixed rates could slowly decline throughout 2023, “maybe as much as 0.50% for the commonly-chosen 5-year fixed term.”
Overall, the broker sees “a positive year ahead” for Canadian home buyers.
Most financial and real estate industry experts agree that mortgage rates will fall in 2023. By how much? That’s still up for debate, with some experts forecasting a 0.5% drop and others feeling like it’s too soon to tell.
No matter the number, lower mortgage rates represent relief for buyers struggling with affordability. If you’ve been waiting to buy due to high home prices and high mortgage rates, 2023 is shaping up to be a good year for you. The good news is that many experts predict moderate declines in home prices as well.
But even as rates come down, they’re not likely to hit 2020 levels—so you’ll want to do everything you can to reduce your rate on your own. That means working on your credit score and shopping around to find the lender with the best terms for you.