canadian-mortgage-rates-2021 Photo: James Bombales

Rock-bottom mortgage rates have been a major driver of red-hot home buying activity across Canada since the country emerged from the widespread lockdowns of spring 2020.

Those rates are likely to stay near all-time lows for the first half of 2021, but an economist with Capital Economics predicts they will begin climbing later in the year.

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The firm’s Senior Canada Economist Stephen Brown wrote this week that mortgage rates could rise even though the Bank of Canada is expected to keep its influential policy rate at a record-low 0.25 percent until 2023.

Brown believes rates will increase before the Bank of Canada makes a move because Canadian bond yields are now forecast to rise this year and in 2022. A bond yield refers to the return that investors earn from holding bonds. In the world of finance, fixed-rate mortgages and bond yields are closely connected — when the latter moves in either direction, it typically has a parallel influence on the former.

According to Capital Economics’ updated yield forecasts, the five-year fixed mortgage rate could rise from its current level of 1.8 percent to anywhere from 2.3 percent to 2.8 percent, depending on how bank funding costs and lending spreads shift in the coming months. Simply put, a bank’s lending spread refers to the difference in the interest rate its borrowers are subject to and the rate that depositors are paid.

While that may seem like a lot of finance jargon to take in, as mortgage rates rise it could amount to a slowdown in home buyer demand, especially in hot, affordability-challenged markets like Toronto and Vancouver where single-family home prices have soared since mid-2020.

It’s unlikely, Brown writes, that home prices will be thrust into reverse if mortgage rates rise this year. Instead, expect national home price inflation to slow down from the 10 percent appreciation forecast for 2021’s first quarter to five percent by the end of the year.

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