Mortgage Blog

Economic Conditions That Can Lead to Higher Rates in Canada

Mortgage rates in Canada have experienced significant fluctuations over the years, and understanding the economic factors that cause these changes is key for homeowners, prospective buyers, and investors alike. Whether you’re looking to buy a home or refinance your mortgage, keeping an eye on economic conditions influencing mortgage rates can help you navigate the market more effectively.

In this blog, we’ll dive into the economic factors affecting mortgage rates, explain why interest rates are going up in Canada, and provide insights on how inflation, GDP, unemployment, and other economic conditions impact mortgage rates. We’ll also offer strategies for investors to adapt to rising rates.

What Causes Mortgage Rates to Rise in Canada?

Mortgage rates in Canada are influenced by a variety of economic factors, both domestic and international. The Bank of Canada’s interest rate decisions are perhaps the most direct and well-known influence on mortgage rates, but they are just one piece of a larger economic puzzle.

Some of the primary causes of rising mortgage rates include:

1. Inflation: When inflation rises, the Bank of Canada often responds by increasing interest rates. This is because higher inflation erodes the purchasing power of money, and increasing rates helps control inflation by reducing consumer spending.
2. Economic Growth: As the economy grows, demand for borrowing increases, which can lead to higher rates. When the economy is strong, people are more likely to take out loans, which drives up the cost of borrowing.
3. Global Economic Factors: International events such as trade disruptions or economic growth in other countries can affect Canada’s economy, indirectly influencing mortgage rates. For example, global supply chain disruptions can lead to higher costs for goods and services, pushing inflation upward and leading to higher rates.
4. Bank of Canada Decisions: A key factor in determining mortgage rates is the Bank of Canada’s interest rate choices. When the central bank raises its key interest rate, lenders follow suit by increasing the rates on mortgages.

Inflation and Mortgage Rates

The impact of inflation is crucial in the rise of mortgage rates in Canada. When inflation increases, the cost of goods and services rises, and the Bank of Canada typically responds by raising interest rates to curb inflationary pressures.

You need to try and understand how inflation impacts the rates. For example, higher interest rates generally slow down consumer spending and borrowing, which in turn helps reduce inflation. However, the downside is that rising interest rates also increase the cost of mortgages, making home ownership more expensive.

Inflation erodes the value of money, which is why central banks use interest rates as a tool to control it. How inflation impacts mortgage rates is often seen when inflation rises beyond the Bank of Canada’s target range, prompting rate hikes to restore balance to the economy.

Bank of Canada Interest Rate Decisions

Mortgage rates are most directly impacted by the Bank of Canada’s interest rate decisions. The overnight rate, or the interest rate at which banks lend to one another, is determined by the central bank. This rate serves as a benchmark for most other interest rates, including those on mortgages. When the Bank of Canada raises its key interest rate, banks and lenders generally follow by increasing their mortgage rates.

The Bank of Canada’s decisions are based on several factors, including inflation, the growth of the economy, and the unemployment rate. If inflation is above target, the central bank will often increase interest rates to bring inflation under control. Conversely, if the economy is weak, the bank may lower interest rates to stimulate borrowing and spending.

Why Are Interest Rates Going Up in Canada?

The main goal of raising interest rates in Canada is to keep inflation under control. After the pandemic-induced economic downturn, Canada’s economy began to recover, leading to rising inflation. In response, the Bank of Canada started increasing its key interest rates in an effort to cool down the economy and bring inflation closer to its 2% target.

As inflation persists, central banks worldwide — including the Bank of Canada—are finding it necessary to raise rates more aggressively. These rate hikes are designed to reduce consumer spending and borrowing, which in turn slows down price increases.

How GDP and Unemployment Affect Rates

Gross Domestic Product (GDP) and unemployment are both significant economic indicators that affect mortgage rates.

• GDP Growth: A growing economy generally leads to higher interest rates. When GDP increases, it signals that demand for goods and services is rising, which can lead to inflation. To prevent the economy from overheating, the Bank of Canada may increase interest rates.
• Unemployment: High unemployment can prompt the central bank to lower interest rates to stimulate economic growth by encouraging borrowing. Reduced interest rates make borrowing more affordable, which encourages consumers and businesses to spend more and contributes to economic recovery. On the other hand, when unemployment is low, the economy is often in a better position, and the central bank may raise interest rates to prevent inflation from spiralling.

Mortgage Rate Forecast for Canada

The mortgage rate forecast for Canada in the coming years is influenced by the direction of inflation, the global economic outlook, and domestic economic conditions. Analysts predict that if inflation continues to rise or remains stubbornly high, the Bank of Canada may continue raising interest rates. As a result, rising interest rates in Canada could persist into the next few years.

However, if inflation begins to stabilize and economic growth slows, there could be a return to lower rates. Homebuyers and investors should stay informed about the Canadian interest rate outlook and plan accordingly.

Strategies for Investors

For investors dealing with rising interest rates, here are some strategies to consider:

1. Lock in Lower Rates: If you’re refinancing or buying a property, consider locking in a mortgage rate while rates are still relatively low. Fixed-rate mortgages can offer some stability and predictability in a rising interest rate environment.
2. Consider Alternative Investments: Rising mortgage rates may make real estate investment less appealing due to higher financing costs. Consider diversifying into other investments, such as bonds or stocks, which may perform better when rates are high.
3. Increase Rent: If you’re a real estate investor, rising interest rates can lead to higher mortgage payments. To maintain profitability, consider adjusting rental prices to reflect the higher cost of ownership.
4. Focus on Long-Term Growth: While higher interest rates may slow down the housing market in the short term, the long-term prospects for real estate in Canada remain strong, especially in high-demand areas. Focus on properties with strong fundamentals that will appreciate over time.

In conclusion, economic conditions influencing mortgage rates are complex and multifaceted. From inflation and the Bank of Canada’s interest rate decisions to GDP growth and unemployment levels, a variety of factors can lead to higher mortgage rates in Canada. While rising rates can be challenging for homeowners and investors, they are also a reflection of a growing economy and the need to control inflation.By understanding these economic factors affecting mortgage rates, you can make more informed decisions when it comes to buying, refinancing, or investing in real estate. Stay updated on the interest rate outlook and consider adjusting your strategies to navigate the rising interest rate environment effectively.