Canada's average variable mortgage rate expected to peak at 6.35%

A snow-covered, single-family neighbourhood in Vancouver. (StandbildCA/Shutterstock)

The average Canadian variable mortgage rate is expected to further rise to 6.35% in the first half of 2023, according to a new bulletin by the BC Real Estate Association (BCREA).

This is up from the expected average of 6.1% within the fourth quarter of 2022.

The variable rate will remain high throughout next year, only decreasing slightly to averages of 6.1% in the third quarter and 5.85% in the fourth quarter of 2023.

The five-year qualifying rate is expected to rise to a peak of 7.5% in the fourth quarter of 2022, and see gradual declines toward 7.05% in the second half of 2023.

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BCREA believes five-year fixed rates have already peaked at their current average of 5.5%, with fixed mortgage rates expected to begin falling in early 2023 and ending at 5.05% in the latter half of next year.

“Despite the decline in bond yields from where they peaked in early October, we have not seen an adjustment to five-year fixed rates as lenders wait for a clear signal on the direction of their funding costs,” reads the bulletin.

“If five-year bond yields sustain the most recent decline, we may see five-year fixed mortgage rates head lower, even in the face of a still-tightening Bank of Canada. The same scenario played out in 2019 when the Bank was near the end of its tightening cycle and economic growth began to stall.”

Just a reminder that in the first quarter of 2022, the average variable rate was just 1.95%, the five-year qualifying rate was 5.25%, and the five-year average discounted rate was 3.59%.

The Bank of Canada is forecast to begin lowering its policy interest rate as early as in the second half of 2023 in response to a significant slowdown in the economy or a recession. Although there could still be further increases, the Bank is expected to be near the end of its current tightening cycle in a bid to curb rampant inflation and escalating home prices.

This follows Wednesday’s announcement on the Bank further increasing the policy interest rate by 0.5% to 4.25%, which represents a full 4% increase in this rate over a number of increases since early Spring 2022.

“That perspective is in line with current financial market expectations showing a similar timing for the Bank to reverse course. Crucially, any loosening of monetary policy will only occur if we see a sustained decline in inflation,” continues the bulletin.

“Given weakening economic growth, falling gasoline and other commodity prices, and fading effects from pandemic driven supply chain problems, we could see a significant downward trajectory for inflation in 2023, which would provide the Bank with the necessary support to begin lowering its policy rate.”

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