What should brokers be advising clients on the interest rate outlook?

Future rate trajectory remains shrouded in uncertainty

What should brokers be advising clients on the interest rate outlook?

It’s no secret that questions about where interest rates are headed are some of the most common and prominent queries fielded by mortgage brokers across Canada – but what’s the best way for mortgage professionals to answer those inquiries?

Recent years have thrown up plenty of twists and turns on the matter, with little to no clarity emerging on when rates will begin to finally tick downwards.

The Bank of Canada has held its policy rate steady for the past nine months despite the expectation of imminent rate cuts, while fixed rates have been on something of a bumpy – and unpredictable – ride over the past 12 months.

Many would-be borrowers or existing homeowners may be holding off on executing their financing plans until rates drop – but it’s important to emphasize that there’s no guarantee rates will drop in the coming months, according to a BC-based broker.

Kyle Green (pictured top), of the Green Mortgage team, told an audience at this week’s Canadian Mortgage Brokers Association – BC conference in Vancouver that he was highlighting the cloudiness of the short-term outlook to borrower clients.

“When you’re talking to a customer, they may say ‘I’m just going to wait. Rates are going to go down… I’m not going to get preapproved. I’m going to wait until closer to my mortgage renewal date, et cetera, before I start the process,’” he said.

“I say, ‘Well, if you look at a long-time horizon, we’re pretty sure that rates will be lower in 12 months. But in a month or two, I’m not actually sure. I’m less sure in a smaller-term horizon that rates will be lower than higher.’”

Where are fixed rates headed for the remainder of the year?

Few of those present indicated their clients were opting for variable rates in the current climate, a direct consequence of the Bank of Canada’s aggressive rate-hiking policy in 2022 and 2023 that saw rates surge from their rock-bottom pandemic lows.

Shorter-term fixed rates of around three years appear to be the most popular options at present, although there’s little clarity on where those rates are headed during the remainder of this year.

Events including the pandemic, Russia’s invasion of Ukraine, the collapse of Silicon Valley Bank and Signature Bank in the US, and current geopolitical unrest have seen bond yields plummet sporadically since 2020, with Green noting how crucial it is for agents and brokers to be able to succinctly explain bond trends to clients.

“One of the things I like to point out to customers when I’m talking about this and trying to talk about predictions is that in general, rates tend to want to go up – and usually the unforeseen circumstances push rates back down,” he said.

“COVID was a reason that the bond rates were very low to start off with. If you look back in the past, some of the large impacts that we’ve seen in our careers where interest rates dropped considerably were 9/11, COVID, the subprime crisis. There’s lots of different things that will come up.”

The easiest way to explain fluctuations in the bond market to clients: “In general, negative news pushes interest rates up,” Green said. “Inflation is negative news, but inflation, generally speaking, usually means we have economic growth and that’s usually where inflation equals rates rising in the bond market.”

How to provide solid advice in uncertain times

Making predictions about where rates are headed can be a dangerous game for brokers, especially with recent inflation trends south of the border suggesting that the Federal Reserve will be in no hurry to slash its own trendsetting rate.

While brokers should avoid overconfidence in their own suggestions about the trajectory of interest rates, Green said presenting borrowers and clients with the views of experts and close market watchers can be a good way to provide advice on rates.

“I don’t like to make predictions,” he said. “One of the important things I like to do: you don’t want to say, ‘I don’t make predictions and therefore, don’t talk to me about it,’ but I like to make sure that I pull up third-party information and data to say, ‘This is what the people that bet on what the Bank of Canada is going to do are looking at.’”

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