Robert McLister: If the market’s crystal ball is off by just two rate cuts, borrowers’ projected variable-rate savings could evaporate
But, you know, there’s something a little too consensus-minded about Canada’s rate outlook. It’s like everyone’s moved to one side of the canoe in their 2025 rate predictions.
Staring down at a mortgage shopper with that trademark ice-cold glare, he’d probably rasp, “You’ve got to ask yourself one question: ‘Do I feel lucky?’”
“Well, do ya, mortgage borrower? In this economy?”
The question is, how much further? With inflation 40 basis points below its two per cent target and gross domestic product at a crawl, there’s no argument from economists that Canada needs at least 50 basis points more easing.
And what if that’s all we get? Or what if the central bank slashes the full 100 basis points (or a bit more) and inflation reemerges in 2025?
This is not any mainstream economist’s base case expectation, but relying solely on economists’ projections to guide mortgage term decisions is like relying on a carnival fortune teller to tell you who you’re going to marry. Both might sound convincing, but let’s be real here.
There’s no question that more mortgagors will start choosing variables now that the Bank of Canada is swinging its rate-cutting machete harder. And that’s historically a sound play at this point in the rate cycle.
But here’s the sobering reality: if the market’s crystal ball is off by just two rate cuts, borrowers’ projected variable-rate savings could evaporate.
So, while economists might prove more right than wrong in their 100-plus basis point calls, mortgage term selection is a risk management exercise. Many borrowers will manage the risk of a rate rebound by flocking to leading three-year fixed rates instead of playing roulette with a variable.
Looking further down the road, there’s a big elephant doing backflips in the room. I’m talking about America’s precarious deficit spending trajectory. If the U.S. fiscal circus turns into a full-blown Treasury market crisis, yields could surge far more than 100 basis points — potentially leaving renewers of three-year terms in a tough spot in 2027/2028. I suspect folks who worry about this fiscal train wreck in-the-making may opt for five-year fixed terms, partly for this reason.
All of this comes back to Dirty Harry’s iconic question. Folks who don’t ‘feel lucky’ can’t be faulted for their financial preservation instincts and locking in. That’s despite the market-implied odds that such a move will cost them — though it won’t be a life-changing amount.
Those who want to press their luck only a little bit can always opt for the fence-sitter’s mortgage of choice, the five-year hybrid. Part fixed and part variable, it’s a compromise tailor-made for uncertainty.
Mortgage rates
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