Mortgage rates can often be disappointing. Case in point: today’s. Us commentators have been talking about diving rates for months, and yes, they’ve dropped. Fixed rates have fallen 150-plus basis points in a year.

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Mortgage hunters are banking on a big drop in rates, but be warned — they could yo-yo Back to video

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But with all the falling rate headlines lately, people expect more. And we may not get more — for a while.

We’re now five months in from the first Bank of Canada rate cut for this cycle and fixed rates are creeping up like people’s blood pressure during tax season.

Rates aren’t rising stratospherically, mind you, about nine to 25 basis points for some of the lowest advertised fixed rates. Default insured rates — used by people with down payments of less than 20 per cent — are the most competitive, so they rise the quickest.

While the latest increases may have people on edge, the real suspense is all about what comes next.

When central banks start cutting rates — especially significant cuts like the half-pointer by the United States Federal Reserve last month — it’s usually a harbinger of economic constipation. And central bankers and economists largely expect such a slowdown — in time.

The question is, what does “in time” mean?

Economies are like slow-turning supertankers. Right now, the U.S. economy — which has a powerful influence on Canadian mortgage rates — seems to have reset its heading. Markets are gradually starting to predict more expansion than anticipated.

The Atlanta Fed’s real-time GDP indicator, for example, suggests a peppy 3.2 per cent growth rate. That’s on top of America’s latest job numbers, which blew away expectations. And then there’s U.S. inflation, which exceeded forecasts on Thursday despite hitting a 44-month low.

Canada’s rate markets are highly sensitive to any hint of inflation risk, including from south of the border. Traders have bet so heavily on rate cuts in the next 18 months, they dread being wrong and fear they may be underestimating North America’s economic resilience. If they are wrong, it means bond yields could pull a Jack-in-the-box, springing up when we least expect it.

What does all of this mean for mortgage shoppers?

This isn’t so much a crystal ball prediction as it is an attempt to manage borrowers’ expectations. While the economy should ultimately slow further, thanks to policy rates being materially higher than inflation, we could have upswings for several months. It’s like expecting a hangover to kick in, but somehow you’re still buzzed at brunch.

Expect to see more market anxiety if U.S. employment remains stable and inflation doesn’t continue its downward progress this fall. And the latter is a real possibility given tougher year-over-year base effects ahead.

Jargon buster: “Base effects” in inflation refer to the impact that the previous year’s price levels have on current year-over-year inflation calculations; specifically, if prices were unusually low in a particular month last year, even a modest price increase this year can result in a higher reported inflation rate.

There’s also the potential that inflation risk comes out of left field, from things like an oil shock, continued government overspending, tariffs (looking at you, Donald Trump), and onshoring. Fortunately, still-elevated central bank policy rates, high housing costs, expensive mortgage renewals, high debt loads and artificial intelligence will keep adding gravity to rates.

The point is, despite borrowing costs being in an overall downtrend, rates could yo-yo for a bit. If you need a fixed mortgage by January or February, get a rate guarantee just in case further rate progress takes longer than expected.

And if you have nagging concerns about inflation making a comeback tour, consider a hybrid mortgage (part fixed/part variable) if you can find one near five per cent. That way, you’re partially shielded in the less likely event that inflation goes rogue, but still benefit if/when rates continue falling, as economists predict.

In other news: the return of 90 per cent refinances

Canadians used to be able to refinance their home and get a mortgage for 90 per cent of its value. The government put the kibosh on that in 2010 amid fears of rising debt loads, financial instability, and an overheating housing market.

Well, what’s old is new. Despite today’s near-record debt levels, policymakers think 90 per cent loan-to-value refinances make sense again. Come Jan. 15, 2025, they’re making a return. But hold your mortgage applications — there’s a twist.

To get one, you’ll need to purchase default insurance, and you need to use the money to build one or more secondary suites on your property. The maximum allowable property value, including the new suite(s), is $2 million, and you can get up to a 30-year amortization.

For folks who don’t have enough spare cash to build a mortgage helper that generates rental income, it may be a viable option. The refinance premium may be steep, but the borrower will get a low insured interest rate, which is often 30 to 50 basis points cheaper than uninsured refinance rates.

There remain some unanswered questions, however:

• What are the default insurance fees?
• Will lenders make borrowers pay for the secondary suite construction upfront or allow draws (partial cash reimbursement) while construction is underway?

It would be swell if the government revealed all the details of new mortgage programs upon announcement, but that may be asking too much. Still, this policy’s not too shabby. It’s not fanning the flames of demand, it’s adding much-needed housing, and history shows that overall insured losses are about as likely as finding a balanced budget in Ottawa.

I do question how many people will bite on this program, given you can’t roll in outside debt, and if borrowers must cover most of the construction costs. Like watching a Netflix cliffhanger, we’re left waiting for answers from the Department of Finance.

Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.  

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