Canadian Interest Rate Forecast

Mortgage-rate-forecastsSince the last rate forecast in January, the long-term projection for prime rate has fallen 1/4 percentage point.

Apart from that, the Big 6 banks’ rate predictions haven’t changed much.

Below you’ll find a summary of the latest year-end interest rate projections from each of Canada’s major 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 3.50
CIBC 2.00 2.25
NBC 2.00 2.75
RBC 2.00 3.00
Scotia 1.50 2.25
TD    2.00   3.00  
Year-end Avg 2.00 2.75
Chg vs Today +1.00 +1.75

(All figures are 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 3.58 4.15
NBC 3.46 3.88
RBC 3.30 4.05
Scotia 2.75 3.00
TD    3.50   3.80  
Year-end Avg 3.32 3.78
Chg vs Today +0.53 +0.99

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

Variable-Rate Mortgage Forecast

If Canada’s primary securities dealers are right, the next Bank of Canada rate increase will happen on July 19. Overnight index swap traders, who make huge bets on Bank of Canada moves, are pricing in a September 7 rate increase. (Source: Reuters)

Major economists now predict a 175 basis point boost to the overnight rate over the next 21 months.  Their estimates, if accurate, imply a 4.75% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.40%.

Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.95% range by year-end 2012. That’s pretty close to today’s 5-year fixed rates.

Fixed-Rate Mortgage Forecast

Major banks foresee 5-year bond yields climbing 99 basis points in the same 21-month timeframe.  That would peg the 5-year yield at 3.78% by the end of next year.  The 10-year average of the five-year yield is 3.66%.

Assuming a typical 120 basis point spread above yields, these forecasts suggest discounted 5-year fixed rates could rise to roughly 4.86% by year-end 2012.

Rate Forecasting In Perspective

The major banks spend millions to formulate accurate interest rate projections.  Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.

Despite economists’ notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.

With that reference point as a “base case,” these forecasts can then be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that’s big enough to account for things like hyper-growth/inflation or those aforementioned economic disruptions.

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 such information.

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, except BMO’s.

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. 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, National Bank, RBC, Scotiabank, TD

Rob McLister, CMT

  1. So hopefully my plan to lock in at 3.74 for 5 years (20 year amortization), using the rapid bi-weekly payment, is the right decision…

  2. I’m just finishing the first year of a five-year-fixed at 3.69%. Is it worth ‘blending and extending’ (with no penalties) to a new five-year term at 3.74% as a means of guaranteeing an extra year of low rates? (E.g. to secure a rate of 3.74 for the years 2015-16?)

  3. The predictions for the overnight rate seem sound but as I am writing this the 5 year bond yield is already higher than Scotia’s predicted 5 year bond yield for the end of 2011. A combination of an improving economy, possible inflation and the bond market’s reaction to BoC interest rate hikes leads me to believe these predictions are too low. If the BoC raises rates for fear of inflation, the market will sell off bonds for the same reason.

  4. @Jeff316 – most lenders no longer “blend & extend”, especially financial institutions. I’m interested in knowing who has this to offer residential clients?

  5. Lenders cannot sustain so slim a spread at 120 bps for long, unless you are a big FI enjoying a huge pool of free balances. Even then, they will have matching and hedging costs. In the end, that spread must widen as the growth in the mortgage market slows. Historically, a spread closer to 200 bps is more profitable for lenders, especially the smaller institutions.

  6. MK here’s some news for you. Lenders have been sustaining less than 120 bps spreads for two years.
    Another news bulletin. Less volume and greater competition shrinks spreads. It doesn’t widen them.

  7. “possible inflation”
    Core inflation in Feb was 0.9%, the lowest in the last 10+ years.
    Did you mean to say possible deflation?

  8. 0.9% is yesterday’s news. BOC policy is forward looking.
    How do you think the U.S. is going to pay for this: ?
    The U.S. is running trillion dollar deficits! That is unsustainable. Its only option is to inflate its way out of debt. Why do you think the US dollar is tanking?
    If you don’t think this and rising commodity prices will affect our inflation rate then you’re looking at different numbers then me.

  9. Yes but its today’s economic data that form the basis of tomorrows forcasts.
    To be honest I dont think the USA or Canada will ever pay for their debt. USA is printing money to as an temporary solution stimulate economic expansion and that will end as soon as the economy can produce on its own. Commodity prices go up and down all the time (just like a VRM rate over a 25 year mortgage), hence why they are left out of core inflation. I don’t see commodities or QE leading to persistantly high and sustained inflation.
    I’m not looking at any different numbers than you, just prefer not to be polarized towards one thing like how the US will pay its debts. Both the inflation and deflation camps make compelling arguements supported by different types of data. The only thing that I’m certain of is the risk of both inflation and deflation is very high right now.

  10. Last October 1st I took out a 1yr closed at 2.2% since it was same as a variable. I might go again with it in 6 months, but definitely variable if it is the cheapest. Anyone benefits going variable, especialy on a big mortgage every percentage point is a lot of cash. Don’t worry – rates won’t go high any time soon. Blips here and there are normal. All of you who locked in few years ago with 5 year closed rate lost a lot of cash since rates during recessions don’t move up, only down. It is such an easy concept, why do you think banks give “discounts” on longer term rates? Because they are making a killing on them.
    And don’t listen to arguments to go long term if you want to sleep at night – such a clishee.

  11. “Don’t worry – rates won’t go high any time soon.”
    LOL. We’re supposed to trust a guy who spells cliche “clishee?”
    “All of you who locked in few years ago with 5 year closed rate lost a lot of cash since rates during recessions don’t move up”
    I bet you’re also really good at picking football winners Monday morning. Since it’s so “easy” maybe the banks should fire all their economists and just hire you??

  12. Inflation and deflation are mutually exclusive. I don’t see how you can have a high risk of both.

  13. hey Rob,
    thanks for this, as I write this I believe most big banks have already jacked up their rates.
    in your mind what is the best way to go today to minimize interest costs? i was thinking the 2yr fixed might be a good idea considering where prime might be in the next 2 yrs based on your other post. As of now I don’t think variable is a good option.

  14. gee the banks are jacking long term rates again and pointing to the bond market as their reason…uh, pardon me but those of us who are tired of the greedy banks perhaps have another explanation…funny how they are timing the rates to go with the annual spring housing market….whoever wins the fed election should consider legislation putting some reins on the greedy canadian banks….course that will never happen…..

  15. np, do you even follow the bond market? Didn’t think so. Your statement is glaringly uninformed and generic. If you have a problem with the “greedy” banks, do yourself a favor and buy their stocks…

  16. Hi takloo,
    As of today, for a well-qualified borrower the 2-year fixed had the lowest hypothetical interest cost in our model, based on a 3.09% rate.
    The variable, 1yr fixed and 3yr are very close behind.
    Problem is, rates are going up tonight so I’d hesitate to answer until we see where things shake out. We’ll put out another term analysis piece shortly to compare the current options.
    As I always stress, these projections are meant as a rough guide only and people need advice specific to their situation. Rate models are solely intended to help people get a sense for how different terms stack up if the future follows a specific course–which we know it rarely does!

  17. perhaps i shld clarify… rates are available at non-banks…mortgage loan companies that are flourishing in the last decade or so because people just got fed up with the greedy canadian banks…sure buy their stocks and it would bias your view, as yours is obv biased.

  18. np, I’m not biased. It’s a free market out there. Rather than complain I choose to turn the profitability (or, “greed” as you call it) of the banks into portfolio gains. Same with gas prices, don’t like them, buy some energy stocks, indexes, etc.

  19. Like most people i automatically went to a bank for a mortgage and even though I had a steady job, a healthy downpayment and an excellant credit rating the bank tried to hit me with a first, second, even a third mortgage. Luckily my agent knew a mortgage loans company, I got the full mortgage and in over 20 years I have never missed a payment. If my only choice back then was a bank I would probably still be renting. Look around before you sign up with one of the major banks. There are many many other viable alternatives.

  20. I want to renegotiate my mtg Aug 2011.It is a closed 5 year term to Aug 2012. Can I do this and how should I go, variable interest or locked in rate?

  21. Yes you can usually break it with a penalty unless it is fully closed.
    No one can advise you based on the limited information you have provided. Get proper advice after speaking with a broker or your bank.

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