BCREA 2010 - 2011 mortgage rate forecast

Borrowing costs on three and five-year fixed rate and term mortgages remained stable during the first two months of 2010, declining slightly by 10 basis points to 4.15 and 5.39 per cent in February.

The BC Real Estate Association (BCREA) expects this dip to be short-lived. Mortgage rates are forecast to rise more quickly during the second half of 2010 and through 2011. Despite this increase, mortgage rates will remain relatively low from a historical perspective.

Mortgage rates will inevitably rise from current levels. Today’s low interest rate environment reflects the ongoing support of the economy by central banks around the world after the worst economic crisis in decades. These low short-term interest rates, combined with economic weakness, higher investor risk aversion and lower inflation expectations drove bond market yields lower and contributed to declines in administered interest rates for products such as mortgages. With global economies on the mend, and Canada recording stronger economic growth, expect the Bank of Canada (BoC) to scale back its monetary stimulus by raising interest rates from the current low levels.

The BoC held the line on its trend setting policy interest rate on March 2, 2010, and reiterated its conditional commitment to keep its policy rate at 0.25 per cent until the end of the second quarter of 2010. However, the BoC will be hard-pressed to maintain its policy rate at the current level once the third quarter rolls around despite the continued headwinds of a strong Canadian dollar and the uncertain US economic climate. Economic activity has been higher and inflation firmer than was projected in the BoC’s January Monetary Policy Report.

Variable mortgage rates, which are tied to prime rates, will rise by the same magnitude. Fixed-rate term mortgage rates, which move closely with bond yields and deposit rates of similar maturity will edge up gradually through 2011. Increases are expected to be modest as a high Canadian dollar temper future growth prospects, and a tepid labour market and uncertainty in the global economy lower inflation expectations, moderating upward pressure on fixed term mortgage rates.

1 Average of weekly data
Source: Bank of Canada, BCREA Forecast

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