What can we expect for Canadian mortgages in 2023?

After a year filled with interest rate hikes, volatility in the housing market and high inflation, many Canadian borrowers are unsure what’s in store for 2023. To set the record straight and ease the uncertainties many people are feeling, here’s a few things we can expect to see in the new year ahead.

Buzz of another rate increase? It’s a toss up

Things can go one of two ways. First, there’s a chance that rates can go up again. There have been some rumblings of another rate hike, and if inflation doesn’t stabilize by the third quarter of 2023, we can expect rates to inch higher. Not to mention, job numbers were stronger than expected in 2022 and the unemployment rate also dropped by 0.1 to five per cent.

On the flip side, there’s also the possibility that rates will decrease as we head into the summer months. While variable rate mortgages are directly affected by the BoC’s decisions, fixed rates are dependent on bond yields. Since bond yields trade in anticipation of the BoC’s rate announcements, we will likely see three- to five-year fixed rates dip lower throughout 2023. Over the last few months, fixed rates have slightly dropped – but they have recently increased and there’s a chance they could continue to do so. Whether this means rates will be in the high three- to low four-per-cent range by the end of 2023, still remains uncertain.

Home prices and rates. They go hand-in-hand

It’s worth mentioning that home prices have consistently dropped since the peak in Q1 2022. Some buyers who bought in 2021 and 2022 with ultra-low variable rates may feel the pinch as variable rates have risen four per cent since the beginning of last year. This could lead some homeowners to switch and lock in a fixed rate, or potentially sell their home if they are no longer able to afford their increased mortgage payments. This is especially true for those with investment properties – as the pinch more strongly felt. If this happens, we could see an increase of homes on the market, priced to sell.

As home sales are a major driver of Canadian GDP, a significant drop in housing prices can have a strong impact on inflation. This could lead rates on the variable side to drop and potentially on the fixed side too – affecting long-term projections and therefore decreasing bond yields and rates.

So, what does this mean if you’re a first-time buyer?

If you’re a first-time homebuyer in this market, there may be a silver lining amid all the uncertainty. The housing market is finally cooling down and home prices are dropping considerably, compared to what we have seen the last few years. This could make it easier for first-timers looking to enter the housing market as declining house prices have increased their overall affordability. This is something that should continue in 2023. As a potential buyer, it is important to consider the long-term opportunity with lower prices, even as rates are higher right now.

When it comes to rates, if you are planning to buy a home this year, it’s a good idea to look into mortgage options with shorter terms, such as two-year fixed rate terms. With persistent inflation and a looming recession, it is looking more and more likely that by 2024 and more likely 2025, we may see fixed rates at levels that Canadians have become more accustomed to over the last 10 years (low- to mid-three-per-cent range). So, the short-term rate is a great way to get in at a higher rate now, but at a lower home price and potentially lower rate in a couple of years on renewal. As the old saying goes, “you date your rate, and marry your price.”

Uncertain economic times are nothing new, and this uneasiness in the housing market is a byproduct of the current environment. It is important to remember that you’re not alone and that your biggest advantage is finding a mortgage professional you can trust, such as those on our team at Homewise, and getting educated on the best available mortgage options before you sign on the dotted line.