Why the window for cheap mortgage money may be narrowing

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeReal EstateMortgagesWhy the window for cheap mortgage money may be narrowingRobert McLister: If government borrowing costs rise, interest payments swell federal deficits and rates rise further — and the loop feeds itself You can save this article by registering for free here. Or sign-in if you have an account.As we speak, markets and economists both point to upward rate risk over the next year or so. Photo by MarchMeena29/Getty ImagesCIBC Capital Markets made a rate call Thursday that mortgage borrowers should know about.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountIn the report, the company’s chief economist Avery Shenfeld predicts that the Bank of Canada’s policy rate will change direction next year.He figures the central bank can sit tight for a while, since the economy still needs a push from cheap money.In 2027, though, Shenfeld sees Canada’s key rate climbing, partly because the worst of the housing and population-growth downdraft has passed and the mortgage renewal shock has faded.Translation for borrowersSUBSCRIBER EXCLUSIVE: FP West: Energy Insider brings you behind the oilpatch’s closed doors with exclusive insights from insiders every Wednesday morning.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of FP West: Energy Insider will soon be in your inbox.We encountered an issue signing you up. Please try againWhen the Bank of Canada faces more pressure to tighten, it means variable and short-term bettors take the same risk for a smaller potential payoff.CIBC also expects Canada’s neutral rate to drift higher as capital spending rebounds (housing included).Quick definition: The “neutral rate” is the theoretical policy setting that neither stimulates nor restrains the economy while pinning inflation near two per cent.Canada’s improving non-U.S. exports, a potential new U.S. trade deal and greater domestic AI investment could support mortgage rates as well.That makes CIBC’s forecast of 50 basis points of central bank tightening by the middle of next year easily plausible, if not conservative.Markets, meanwhile, price a 25-basis-point hike by January as a done deal.And if you’re wondering why markets expect rate hikes sooner than economists, Shenfeld attributes it to “Naive, monkey see and monkey do.”“The markets are likely picking up Canadian spillover from the same story hitting the U.S., that if the U.S. is headed for hikes, we must be too.”Where U.S. deficits come inAmerica’s influence on our mortgage rates never goes away, nor does its debt.CIBC names government deficits a direct driver of the neutral rate — larger deficits mean a higher neutral rate, other things being equal.That’s true on both sides of the border, but our two countries’ fiscal excesses are no longer comparable.U.S. deficits run near six per cent of GDP versus only one per cent in Canada.Despite Canada’s relative restraint, that American number is a problem.JPMorgan recently projected U.S. debt could reach 120 per cent of GDP with deficits at five to seven per cent of GDP over the next decade.If they’re right, Washington’s spending could push global public debt well past today’s US$100 trillion, with net interest costs reaching US$2.7 trillion by 2036.Eventually, such mind-bending numbers could make people lending money to the U.S. government nervous, and that should matter to all Canadians since bond yields drive most mortgage pricing.Fun facts: Over the past two decades, quick analysis of Canadian and U.S. five-year bonds shows that when the U.S. five-year yield moves one basis point, Canada’s moves about 0.65 basis points on average. Statistically, the same forces are responsible for over half of the variance in U.S. and Canadian rates.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.In other words, if U.S. rates surge, we need to be prepared as Canadian mortgage holders, even if nothing domestically seems to warrant hikes.More on fixed ratesJPMorgan raised its long-run 10-year Treasury forecast, implying U.S. rates could add another 80-plus basis points if inflation stays glued near three per cent, its average over the past year.The company also flagged de-globalization as a rate-positive force. It said global trade is not collapsing. In fact, it rose 11 per cent in the first quarter, despite war and tariffs.Still, supply shocks are more frequent, and bringing manufacturing back to North America creates duplicative investment, raising capital demand (and hence, rates).Speaking of which, tech companies are borrowing massive gobs of money, Shenfeld says, and that appetite could keep lifting global rates, with at least “some degree of spillover into the Canadian five-year bond yield.”It’s already showing up in longer-term yields, whose trends often trickle down to the mortgage-critical five-year bond.Specifically, we just saw the U.S. 30-year yield trade at its highest since July 2007.And here’s the thing: it’s not all inflation fear causing it, despite popular belief.Inflation breakevens, which approximate inflation’s impact on bond yields, are relatively tame.The biggest problem is that investors are demanding fatter risk premiums to hold longer-term bonds. And given America’s fiscal outlook, who can blame them?The worst-case scenarioEver-increasing U.S. debt also raises doom-loop risk, warns the C.D. Howe Institute.That is, if investors start seriously doubting sustainability, government borrowing costs rise.If government borrowing costs rise, interest payments swell federal deficits and rates rise further — and the loop feeds itself.C.D. Howe fellow Martin Eichenbaum says, “That is not alarmism. It is arithmetic.”For his part, Shenfeld tells me, “I don’t believe anyone thinks the U.S. will default on U.S. dollar debt.”The likelier problem is that markets will anticipate much more U.S. debt issuance (debt supply), and that could push rates up.That scenario, he expects, will have “some” impact on Canadian mortgage rates.The Canadian borrower’s problemIf these theories hold up, it means the window for cheap mortgage money may be narrower than hoped.As we speak, markets and economists both point to upward rate risk over the next year or so.Of course, no one knows how long the hike cycle would last, but rates are cyclical. That means what goes up virtually always comes down. The Bank of Canada’s two per cent inflation target pretty much ensures it.CIBC sees the U.S. neutral rate eventually drifting down as the AI investment boom decelerates and the “benefits” of AI (fewer people needed to do the same work) cut costs.By then, particularly if Washington curbs its runaway spending habit, North American growth should stumble well before a five-year mortgage term is up.The question is whether investors start punishing American fiscal habits. If so, fixed mortgage rates (for new borrowers) could stay elevated for longer.But even if we see monetary tightening as some expect, Shenfeld suggests that nobody should lose sleep over large imminent mortgage rate spikes.“While bond markets assume what happens in the U.S. happens in Canada, facts say otherwise,” he notes. “We need to take a breath because our inflation rate is better contained than the U.S.’s”Either way, if you’re going to be carrying a mortgage for years, have a broker model different rate paths and show how you’d land in a variable, three-year fixed and five-year fixed. Ask for best, worst and base cases on every term.Most likely, the fixed wins if market expectations pan out, but savvy brokers can simulate different rate outcomes and test that theory.Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.For the best national insured and uninsured mortgage rates, updated daily, please visit our mortgage rate page here.We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.