Robert Burton says mortgage rates will likely not skyrocket in next few years like in the early 80’s (peaking at just over 21 percent in the second half of 1981) but points to a recent report which states the borrowers should expect rates to rise near 5 percent by early 2019.
According to Economists Desjardins
“An extensive rise in interest rates will possibly take place in the coming years if the economic expansion continues in North America,” warns Desjardins Senior Economist Mathieu D’Anjou in an Economic report.
A Short Break in Their Rising Trend
From the viewpoint of Robert Burton, he cites that the reports suggest that the general trend for interest rates will primarily reflect vibration in the next few years.
Growing geopolitical pressures and uncertainty over elections led many European investors to favor safe haven securities. Usually, geopolitical concerns do not have a long-lasting impression on the markets.
Signals reflect stronger global growth in 2017 and 2018 as compared to previous years. On the other hand, if the U.S. government fails to go ahead with the growth rate of public debt, the Feds could continue to gradually tighten its monetary policy and other central banks, including the Bank of Canada, could do the same. A gradual rise in North American bond yields could result.
Canadian Mortgage Rates – Impact
There are no signs that Canadian interest rates will unexpectedly jump back up to the levels as seen in the early 2000s, or, worse, in the early 1980s. However, people need to be prepared for rising rates in the next few years according to Robert Burton. Especially borrowers who need to renew their mortgages during the amortization period.
In Canada, variable-rate mortgages are the most important. The variable rate is directly tied to Canada’s monetary policy based on the prime rate offered by financial institutions. You can expect the variable rate to closely follow the Canadian overnight rate in the coming years – to go up.
On the other hand, a closed 5-year mortgage plays a different hand. The rate for closed 5‑year mortgages will reflect the financing costs of Canadian financial institutions, which closely reflect changes in 5-year federal yields under normal circumstances.
An Extensive Economic Expansion, Leading to Higher Interest Rates
To Canadian borrowers, interest rates seem to be reassuring. However it’s difficult to forecast turnarounds in the economic cycle, the economists are suggesting monetary tightening cycle could be extended in Canada. The Bank of Canada could increase its rates by 0.50% per year from 2019 to 2021, or rise about 2.50%. In this climate, the Canadian 5-year rate could increase to approximately 3.10%. In a medium-term horizon, variable rates and 5-year mortgage rates could thus rise by approximately 2%.
The Bottom Line
Obviously, one can expect plenty of other scenarios affecting mortgage rates rise and fall. In the present climate, our current scenario indicates a minor increase in mortgage rates is most likely. To ensure safety, mortgage borrower’s need to be prepared for an alternative realistic scenario says, Robert Burton. For example, borrowers shouldn’t be caught off-guard in five years. Mortgage rates of less than 3% currently being obtained by some borrowers have a high predictability of being replaced with rates closer to 5%.