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  • Ted Rechtshaften

Interest rate cuts will be the story of 2024 —what that means for mortgages and more

Bank of Canada rate cuts will be cause for celebration for many

The Bank of Canada overnight rate started 2023 at 4.25 per cent and will finish the year at five per cent, for a rise of 0.75 per cent after a rise of four per cent in 2022. I believe we will see a two per cent decline in rates by the end of 2024, back to an overnight rate of three per cent. The impacts of this decline will be the story of 2024.

Just for fun and to really stick my neck out there, here is my detailed prediction for the central bank’s moves in 2024: Jan. 24: no rate change; March 6: no rate change; April 10: 25-basis-point (bps) drop; June 5: 50 bps drop; July 24: 50 bps drop; Sept. 4: 25 bps drop; Oct. 23: 25 bps drop; and Dec. 11: 25 bps drop.

These predictions are based on a combination of factors, including the negative direction of the Canadian economy, Canada’s interdependency with other central banks, specifically in the United States and European Union, and how the Bank of Canada has historically made rate moves. It is generally slow to make a change in direction, often starting changes later than it should have (in hindsight), but it tends to move quickly once it finally makes that shift.

The speed at which rates went up is certainly a factor on the speed at which they will then come down. Having said that, we are not returning to the super-low interest rate world that we found ourselves in during 2020 and 2021.


It is important to remember that overnight rates are only part of the interest rate equation. As I write this, the five-year Canadian bond yield has had a much different path than overnight rates in 2023. Keep in mind that these rates move with the market, so they tend to move in advance of expected activity.

The five-year Canadian bond yield started the year at 3.42 per cent and was 3.27 per cent as of mid-December. Of course, there has been a lot of movement along the way. It hit a low of 2.65 per cent in March and a high of 4.45 per cent in early October. Those are significant shifts, but we expect much less volatility in 2024.

What will the rate changes mean for mortgages?

I would break mortgages into three categories: variable rate, three-year fixed rate (very popular at the moment) and five-year fixed rate. I will use pretty standard market rates here for uninsured mortgages, but keep in mind there are usually better rates available through special deals and smaller lenders.

Today, a home equity line of credit at prime is 7.2 per cent. If rates drop two per cent, the rate will be 5.2 per cent at the end of 2024. Still higher than the incredibly low rates of 2021, but a meaningful relief for those with debts here.

It is easiest to see the impact on variable-rate mortgages, which have two levers. The first is directly tied to overnight bank rates and would also drop from a decline in those rates. If a five-year variable-rate mortgage today at a big bank is prime minus 0.2 per cent, the rate is seven per cent. Therefore, a decline of two per cent in the overnight rate will lower it to five per cent.

But that isn’t the end of the story. Terms can drop as low as prime minus one per cent when things are going great. My expectation is bank rates will decline, and the “minus” part of the mortgage rate will also improve. If it moved to prime minus 0.5 per cent from the big banks, the rate in a year would be something closer to 4.7 per cent.

A three-year fixed-rate mortgage is currently around 6.35 per cent. The three-year Canada bond yield is 3.74 per cent. The spread between those numbers is 2.61 per cent. That is quite wide historically. Over the past year, the three-year bond yield has ranged from a low of 3.03 per cent to 4.82 per cent, and 3.74 per cent is a long way off 4.82 per cent.

I am not sure the three-year bond yield will be that much lower at the end of 2024, maybe 3.25 per cent, but mortgage rates should come down as the spread with the bond yield gets smaller. Perhaps, we will see three-year mortgage rates closer to 5.25 per cent by year-end 2024.

As for five-year fixed rates, the rate is now around 6.2 per cent. The five-year Canada bond yield is 3.23 per cent. The spread between those numbers is 2.97 per cent, very wide historically. Over the past year, the five-year bond yield has ranged from a low of 2.65 per cent to 4.45 per cent, so 3.23 per cent is a long way off 4.45 per cent.

The five-year bond yield may not come down at all by the end of 2024. This would make sense if the yield curve returned to normal, meaning a lower yield for overnight rates and a rising yield as the term gets longer. Again, five-year mortgage rates should still come down as the spread gets smaller.

Perhaps, we will see five-year mortgage rates closer to five per cent by the end of 2024, especially since these rates are the most competitive term and will once again become more popular than two- or three-year terms.

In summary, I see five-year variable rate mortgages coming down 2.3 per cent over the year, three-year fixed-rate mortgages dropping by 1.1 per cent and five-year fixed-rate mortgages falling 1.2 per cent by year-end.

What will this mean for investments?

Some investments had a great year in 2023, but the majority of bonds, stocks and preferred shares did not.

Rising and high interest rates, of course, put pressure on bonds, but also real estate investment trusts (REITs), utilities and financials. These are the sectors that often fill the portfolios of more conservative investors. The weakness was not just in 2023, but during most of 2022 as well.

These portfolios and sectors will have their day in 2024, as guaranteed investment certificates and money market funds trail.

On the stock front in Canada, utilities were down over the past two years by more than seven per cent. Capped REITs were down over 10 per cent cumulative during the same period, while capped financials were up just two per cent. We see some strength from names such as Emera Inc., Manulife Financial Corp., Capital Power Corp. and Royal Bank of Canada.

In the U.S., in consumer staples and health care areas we might see some strength/recovery, including names like Colgate Palmolive Co., Viatris Inc., Johnson & Johnson and Gilead Sciences Inc.

In the bond market, we expect better overall returns, but we still don’t expect very large gains. The long end of the bond market could benefit the most from lower rates, but we don’t expect to see meaningful declines from here in long bond yields. They also have the biggest volatility. Likely, the middle-range corporate bonds should have the best risk/reward returns in 2024.

We do see some wins currently from high-yielding structured notes, being able to earn income in the 10 per cent to 14 per cent range, while also seeing some solid returns from Canadian bank limited recourse capital notes (LRCNs), which are paying in the range of 7.5 per cent. These yields on special investments will not last that much longer and should be taken advantage of now.

Ted Rechtshaften

Financial Post

December 27, 2023


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