Variable Rate Mortgages, Fixed Rate Mortgages & Where Home Prices are Headed in Simcoe County: An Overview

The world of mortgages and interest rates can feel complicated, but it doesn’t have to be. Over the almost 20 years I’ve been selling real estate, I get asked how variable and fixed interest rates affect homebuyers, especially with the recent news about interest rate reductions and shifts in the bond market. This blog aims to break down how the policy interest rate affects variable rate mortgages, how fixed-rate mortgages tie into the bond market, and what we can possibly expect for housing prices in Simcoe County and the Barrie area over the coming months.

Understanding Policy Interest Rates and Variable Rate Mortgages

The policy interest rate, set by the Bank of Canada, is like the heartbeat of the financial world. It’s the rate that everyone chatters about on Social Media and News Networks. When the Bank of Canada raises or lowers this rate, it directly influences the interest rates charged by banks on things like credit cards, loans, and—most importantly for homeowners by way of variable rate mortgages.

A variable rate mortgage is one where your interest rate fluctuates based on the Bank of Canada's policy rate.  If the policy interest rate goes down, your mortgage rate will likely go down too, meaning you'll pay less interest on your home loan. This is why the  recent 0.25% reductions in the policy rate over the last three announcements are good news for homeowners with variable rate mortgages. 

Starting in March 2022, the Bank of Canada began hiking the rate from its historic low of 0.25%, and by July 2023, the rate had reached a whopping 5.0%—its highest level since 2001.  This series of rapid increases caused everyone with a variable rate mortgage to experience painful and higher interest payments on their mortgages right through June 5, 2024, when the first .25% rate drop was announced. 

Some relief is finally here with these cuts, and the consensus is more reductions are planned for October and December 2024.

But what about fixed-rate mortgages? These types of mortgages don’t change when the policy rate moves. Instead, fixed-rate mortgages are influenced by a completely different mechanism—the bond market.

How Fixed-Rate Mortgages are Affected by the Bond Market

Unlike variable rate mortgages, fixed-rate mortgages are tied to Canadian government bonds, specifically the five-year bond yield. In simple terms, when the bond yield rises, so do fixed mortgage rates, and when bond yields fall, fixed rates tend to follow. (Yield is a term used to describe the % of return an investor receives on the price of the bond they invested in)

Why? Bonds are considered a safe investment. When investors think the economy is going to slow down (for example, if interest rates are expected to drop), they buy bonds, which pushes the bond price up and the yield (the effective interest rate paid by the bond) down. Lower bond yields mean banks can offer lower interest rates on fixed-rate mortgages.

Right now, Canada’s bond market reflects concerns about future economic conditions, which is why bond yields have been fluctuating but are generally trending lower. This has resulted in fixed mortgage rates becoming more attractive compared to earlier this year. 

The Relationship Between Interest Rates, Bonds, and Housing Prices

Historically, when policy interest rates and bond yields drop, mortgage rates follow. Lower mortgage rates make borrowing more affordable, which encourages more people to enter the housing market. With increased demand for homes, housing prices often rise.

It is important to remember that many factors influence housing prices, like supply and demand, local market conditions, and broader economic factors. At the time of this writing, markets across Canada are experiencing shortages in housing while, according to Statistics Canada, population has increased 6.8% between 2021 to 2024. In 2023 alone, Canada’s population grew by 3.2%, the highest annual growth rate since 1957!

As such, these factors could play a critical role in keeping housing prices lower for some time. 

Traditionally,  lower interest rates and bond yields have historically led to increased home prices, however, there is historical evidence in Canada showing that after periods of high inflation and high interest rates, followed by rate cuts, housing prices can continue to decline for a period of time.

This trend occurs because it takes time for the effects of rate cuts to flow through the economy. Factors, such as consumer sentiment, employment rates, and housing supply, influence whether or when housing prices will recover. Additionally, after a period of rate hikes, the affordability gap created by high prices and interest rates can take time to close, meaning demand for housing may remain weak despite lower rates.

So What Can We Expect for the Next 3–6 Months?

If the current sentiment holds and policy interest rates continue to drop over the next few announcements, we can expect the following trends to impact the housing market:

1. Variable Rate Mortgage Relief: Homeowners with variable rate mortgages may see their payments decrease further, putting more money back in their pockets.

2. Attractive Fixed-Rate Mortgages: As bond yields decrease, fixed mortgage rates could continue to become more affordable, attracting new buyers and encouraging refinances.

3. Increased Demand for Homes: Lower interest rates generally lead to more homebuyers entering the market, which could put upward pressure on home prices, especially in desirable areas like Simcoe County.

4. Potential for Higher Home Prices, over time: If interest rates remain low and demand for homes increases, we could see some upward pressure on home prices, although the magnitude will depend on local supply and broader economic conditions, as noted above.

In summary, the recent policy interest rate cuts and trends in the bond market are making both variable and fixed-rate mortgages more affordable. Historically, this kind of environment leads to increased demand and higher home prices. If these trends continue for the next 3-6 months, we could see more competition in the housing market, which would likely drive prices higher.

If you're thinking about buying a home or refinancing, now is a great time to explore your options. Feel free to reach out if you have any questions or need guidance on navigating this evolving market!