Canadian Interest Rate Forecast

Economic optimism has ratcheted up a notch in the last month or so. In turn, bond yield expectations have bumped up roughly 1/4 percentage point since the last rate forecast in October.

Mortgage-rate-forecasts Below you’ll find a summary of the latest year-end interest rate projections from each of Canada’s Big 6 banks. Use them only as a rough guide because economist rate outlooks have considerable margins of error.

Latest Overnight Rate Forecast

The Bank of Canada’s overnight target has a direct impact on variable mortgage rates.

Bank 2011 2012
BMO 2.00 3.75
CIBC 2.00 N/A
NBC 2.00 2.75
RBC 2.00 3.50
Scotia 1.50 2.25
TD    2.00   3.00  
Year-end Avg 2.00 3.00
Chg vs Today +1.00 +2.00

(All figures rounded to the nearest 1/4 point increment.)

Latest 5-Year Government Bond Yield Forecast

Government bond yields drive 5-year fixed mortgage rates.

Bank 2011 2012
BMO 3.53 4.15
NBC 3.45 3.81
RBC 3.55 4.05
Scotia 2.65 3.00
TD    3.25   3.75  
Year-end Avg 3.29 3.75
Chg vs Today +0.75 +1.21

(CIBC’s 5-year bond forecast was not available.)

Variable-Rate Mortgage Forecast

Analysts still expect the Bank of Canada to remain on the sidelines until 2nd quarter 2011. On average, major economists now predict a 200 basis point increase in the overnight rate over the next 24 months.  Their outlooks, if accurate, imply a 5.00% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.48%.

Based on a 75-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 4.25% range by year-end 2012.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 121 basis points in the same 24-month timeframe.  That would put the 5-year yield at 3.75% by the end of next year.  The 10-year average of the five-year yield is 3.71%.

Assuming a typical 120 basis point spread above yields, these forecasts suggest deep-discounted 5-year fixed rates could rise to roughly 4.95% by year-end 2012.

Rate Forecasting In Perspective

Major economists are paid well to tell us where interest rates are headed.  They have access to every data source, academic study, historical backtest, and analysis tool imaginable. While far from infallible, these forecasts serve as a point of reference when creating amortization models based on future rate assumptions.


Other Things to Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online.

History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Bank estimates are taken from the latest forecasts published on their respective websites. For banks reporting rate forecasts as averages for a quarter, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2011 and 2012. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada’s standard rate setting increments.

Data Sources:  BMO, CIBC, NBC (National Bank), RBC, Scotiabank, TD

  1. Have you ever tracked the rate forecast compared to actual on say a five year basis for this group of banks. Would be interesting to see how their economists have done. Do they swing outside of actual rates with general crowd enthusiasm? Or does the averaging keep them inside the actual swings?

  2. Neil – that’s all but useless now because events happen along the way that make it easy to explain why the forecasts weren’t perfect. At the very least you need to wait until there is a 2-year period with very little financial news of note in the world :)
    I’m sure that all of these forecasts are the best results you can get by looking at what the current conditions imply for the next few years but the only perfect forecasts would come from people who predict major events – and that’s much harder.

  3. Hi Neil,
    Most good economists are only somewhat better than 50/50 on rate direction (due in part to the reasons Richard notes), and near 50/50 on rate magnitude.
    Economists tend to huddle together in safe packs. That partly explains why almost all of them peg the year-end overnight at 2%. Nonetheless, their forecasts serve as a good baseline for what could happen if the world unfolds like their assumptions. From there you can build in different scenarios and simulate the outcomes–which helps in mortgage planning.
    Interestingly, the most famous economists, and those who are most confident and conclusive in their predictions, are the most wrong!
    We’ll do a story on the research surrounding this in the near future. In the meantime, check out the book “Future Babble” by Dan Gardner (for which I’m thankful to John Kelly at Verico for the recommendation!).

  4. It would appear that a variable rate is still advantageous for home owners who can deal with the uncertainty. Over time the variable rate still trumps savings on a fixed mortgage.

  5. Hi,
    I am wondering what the best way to approach locking in rates. We have a few pre-approvals with different lenders on the go mostly expiring in mid-March and mid-April for 5 year fixed at 3.44% and 3.59%. However, if in February it looks likely that we won’t purchase by the March deadline, should I cancel the pre-approval to lock in another 120 day hold or wait till the March deadline occurs. I guess my question is how best to stagger 120-day rate holds so that we are best protected from a sudden jump in rates (without approaching new lenders because we don’t want additional credit hits). Also I presume that you can only have 1 rate hold at a time with each lender.
    Any advice appreciated.

  6. I have variable mortgage with Prime – .75, shall I continue the same or shall I go for fixed.. any advice is appricated.

  7. I would keep a variable rate, but you can do better than prime – 0.75. Some lenders are offering prime – 0.90. Not much of a difference, but money is money!

  8. Prime – .9% is only available through Industrial Alliance brokers and it is a heavily restrictive mortgage. You would be safer in a regular variable at prime – .8%. That assumes you want a variable. Short term fixed mortgages are better if you think rates will be on the increase.

  9. We have a variable 2.75% mortgage, matures july 2012, remaining amortization 5 years 4 months. Should we change to fixed now? Wait till 2012? And if we change to fixed for how long? Any help would be appreciated

  10. hi, i am trying to decide between a fixed rate of 3.3% for 2 years or a 3 year varialbe closed at 2.5%. I am hoping to sell within the next 1.5 to 2 years. Which option would be better? Under the 3 year variable closed I would pay 3 months interest as a penalty but with the other option I may pay 3 months interest or a interest rate differential. I have not idea what a interest rate differential would mean financially. any advice?

  11. Hi Sandy,
    First off, assuming you’re well-qualified and other things are equal, it could definitely pay to shop around more on those rates.
    Secondly, if you assume prime rate will jump over 1% in the next 12-18 months, and you are sure you won’t break the mortgage before 24 months, then a two-year fixed (at a lower rate) may be the better of the two choices you’ve presented.
    There are several factors to consider, however, so chat with a mortgage adviser about all the decision points.

  12. Hello,
    My question is we have a $250K mortgage and were thinking would it be better to lock in for 10yrs @ 5% or go short term 5yrs @ 3.75% and hope interest rates don’t kill us in the future??
    Thank you for your help!!

  13. Hi May,
    10-year terms are more expensive about 90% of the time based on our findings. The rate on 5-year fixed terms would need to surge over 3.25% at renewal for a 10-year to be cheaper. I wouldn’t bet on that.
    Given the two options you’ve presented, most people would be much better off taking a 5-year fixed and matching the payments they’d make on a 10-year fixed.

  14. I have a choice between a Prime -0.85 (5yr Closed) and a 3 yr Fixed rate of 2.99%. The rate increase predictions seem to vary considerably. I looked at some of the historical data on rate increases and it seems that the 2.99% is likely to win over the 3 year period…but I’m not sure whether I would lose when I renegotiate vs the variable rate over 5 yrs. Thoughts?

  15. Hi Gareth,
    Thanks for the post. It’s not possible to make a recommendation without knowing the rest of your circumstances. However, based solely on the math, IF you assume economists’ rate projections are correct, the 3-year “may” be hypothetically cheaper. But there are so many other factors to consider. You’re best to speak with a mortgage professional for a full assessment. Here’s a directory of mortgage advisers or feel free to email if we can help further.

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