Mortgage borrowers may want to pay closer attention to where interest rates are headed over the next year. CIBC Capital Markets is forecasting that the Bank of Canada could begin raising its policy rate again in 2027, as the Canadian economy strengthens and the impact of mortgage renewals and slower population growth fades.
CIBC expects the Bank of Canada could raise rates by approximately 0.50%, or 50 basis points, by the middle of next year. While this does not mean large increases are guaranteed, both economists and financial markets are currently pointing to some upward pressure on rates over the coming year.
One of the biggest factors affecting fixed mortgage rates is the bond market. Canadian five-year bond yields are heavily influenced by what happens with U.S. bond yields. Over the past two decades, when U.S. five-year bond yields have moved by one basis point, Canadian five-year yields have moved about 0.65 basis points on average. This means higher U.S. yields can put upward pressure on Canadian fixed mortgage rates even if the Bank of Canada does not raise its own policy rate.
Concerns about U.S. government debt and spending are another factor. The U.S. deficit is currently around 6% of GDP, compared with roughly 1% in Canada. This is the amount of overspending that occurs annually. In addition, JPMorgan has projected that total U.S. government debt could reach about 120% of GDP, with deficits remaining between 5% and 7% of GDP over the next decade. If investors become more concerned about the amount of U.S. debt being issued, they may demand higher returns to hold longer-term government bonds. This could push U.S. bond yields higher and, in turn, put additional pressure on Canadian mortgage rates.
Continued investment in areas such as artificial intelligence could also increase demand for capital and contribute to higher global interest rates. However, this does not necessarily mean that rates are about to increase dramatically. Canada’s inflation rate remains better contained than in the United States, and the Bank of Canada will continue to consider economic conditions before making any changes.
What does this mean for borrowers?
While nobody can predict exactly where mortgage rates will be in the future, understanding the different term and rate possibilities can help you make a more informed decision rather than simply choosing the lowest rate available today. Picking the correct term rather than lowest rate will save you money in the long term.
If you need more information regarding mortgages or if you need any advice on your personal situation please contact our office at 604-556-3893 or email at alex.kotai@ymscanada.ca.
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