Too early for borrowers to do the happy dance over promised interest rate cuts

by Sergey Korostensky

Robert McLister: The Fed reassured markets this week, but Bank of Canada will want to see more

Bank of Canada governor Tiff Macklem, left, and Fed chair Jerome Powell are still keeping an eye on inflation. PHOTO BY CANADIAN PRESS/GETTY IMAGES

Rate markets breathed a sigh of relief this week when the world’s most powerful central banker, United States Federal Reserve chair Jerome Powell, reassured markets that peppy economic growth probably won’t upset the apple cart on 2024 rate cuts.

That was music to the ears of Canada’s mortgage market, given the strong 0.92 long-term correlation between the two countries’ policy rates.

It’s too early for weary borrowers to do the happy dance, though. The Bank of Canada will probably want average core inflation (now 3.15 per cent) to fall meaningfully below its three per cent control ceiling before pulling the trigger on cuts.

Meanwhile, the lowest nationally advertised mortgage rates are like a well-trained dog — staying put. Lenders are just biding time until bond yields make a move.

Ever-popular are three-year fixed rates. Compared to a five-year, they cost a teeny bit more. But you get warm and fuzzy payment predictability until 2027, with the option to renew sooner at potentially kinder interest rates.

For default-insured borrowers, adjustable-rate mortgages continue to be a sweet spot given:

They model out well in rate simulations, assuming rates fall 200-plus basis points, as implied by the bond market;
Adjustable payments drop like they’re hot when prime rate dips, affording budget relief;
They’re as flexible as a gymnast, with low prepayment penalties and the ability to lock into a fixed term anytime;
And discount lenders sell them at 5.99 per cent or less.

But floating rates aren’t for the financially timid. They saddle you with a rate premium — at least one per cent more than a three-year fixed — and they’re a much worse value for uninsured borrowers. And despite the betting odds on a Bank of Canada rate cut, higher inflation (and rates) sometimes come out of left field.