Mortgage rates and the Economic outlook – you can’t have a good discussion of one without the other.

As hard as this is to write, it looks like the five-year fixed mortgage rate will be stable at around 2.70% for some time. I write this knowing that as soon as this hits the printer that economic factors can change enough to make rates move upwards. Let’s take a look at why rates will likely stay low for another six months.

The Five-Year Bond Yield is hovering around 0.75%. This is the security that influences the five-year fixed mortgage rate the most because it is the basic cost of mortgage money to mortgage lenders. With the banks needing to charge 1.50-1.75% higher in order to pay for their overhead and make a profit this translates into a required mortgage rate of around 2.25-2.50%. Currently the rate is 2.69% at most mortgage lenders, meaning they have a little breathing room for rates to go lower still.

CPI (Consumer Price Index) and Core Inflation (1% and 2.3%) are tracking close to the targets set out by the Bank of Canada (CPI being on the low end), and as such there isn’t much pressure on the Bank to increase its rate or for investors to get worried about inflation. This will keep bond yields and the Prime Rate low, translating into little pressure for mortgage rates to rise.

Unit Labour Costs – they’re rising at a slow rate. A slow wage increase means lower inflation in the future. This is good for mortgage rates too.

PPI – The Producer Price Index is flat, meaning the costs of manufacturing and service companies aren’t rising. (Some of this is a result of low oil prices.) A flat PPI means there will be little pressure on inflation in 6-12 months, resulting in very stable mortgage rates.

It is my belief that we are in a very fortunate situation for many buyers, especially first-time buyers and low income earners. There are four key variables that go into calculating how much mortgage balance a person qualifies for: 1) the amortization period, 2) their income, and 3) the interest rate. Low mortgage rates have provided first-time buyers and people moving up with larger mortgages (and purchase prices) for the same monthly payment.

People should take advantage of this situation by paying a little more against their mortgages in order to wipe out their debt sooner. A small amount like $25 per payment makes a big difference over ten or twenty years.