Canadian Real Mortgage Rates Are Now Deeply Negative As Bank of Canada Hesitates

Canadians are borrowing mortgage debt at one of the most rapid rates in history, and with good reason. Bank of Canada (BoC) data shows borrowers were getting rock bottom rates in November. The rates are actually so low, they’re now way below inflation. Canada now has negative real mortgage rates, which are as close to free money as borrows can get. Is there any wonder why there’s a mad dash to borrow, even while inventory is limited?

Real Mortgage Rates

Real mortgage rates are the cost of a mortgage adjusted for inflation. Lenders are in the business of making money, and generally don’t lend for a loss. A loss would include returning less than inflation, since the repaid money would have less buying power.

That’s why rates tend to climb with inflation, except in unusual circumstances. Those circumstances are generally:

• Deflation. If a lender expects deflation, they’re expecting the opposite of inflation. The money you’ll pay back will have higher buying power.
• Forced allocation. If lenders are forced or incentivized to lend, they’ll make loans for a loss. Sometimes they aren’t the final holder of the debt, and don’t actually incur the losses.
• Cash looks dangerous. Negative yielding investments can be safer than holding unallocated cash for various reasons. It’s like paying someone a small fee to take care of your obscene amount of money.

To borrowers, it seems like free money since you’re getting debt that will erode over time due to inflation. It can work out well, but the longer the trade timeline the higher the risk. These are usually short-term circumstances, unless there’s something severely wrong with the economy. There’s also the risk assets get repriced when the inefficiency is purged as well, like in the early 1980s.

On that note, let’s see how negative these real mortgage rates have become.

Real 5-Year Fixed Mortgages Have Negative Rates

A 5-year fixed rate mortgage has interest costs tied to the bond market. These borrowers paid more for both insured (2.23%) and uninsured (2.36%) mortgages in November. It was the highest average rate for both segments since July 2020, but inflation was much lower back then. 

Canadian Real Fixed Rate Mortgage Cost

The inflation adjusted average rate of interest for insured and uninsured fixed rate mortgages with a term of 5-years or longer.

Source: Bank of Canada; Better Dwelling.

The rate might be climbing but inflation is rising even faster these days. Real interest costs for both insured (-2.5%) and uninsured (-2.4%) mortgages are now well into the negatives. While fixed rate mortgage costs have been climbing after adjusting for inflation, they’re actually some of the cheapest in history.

Real Variable Mortgage Rates Have Never Been This Low

Variable-rate mortgages are based on short-term interest rates, such as the overnight rate. In November, the interest rate for both insured (1.46%) and uninsured (1.47%) mortgages remained low. When adjusted for inflation, real rates for insured (-3.3%) and uninsured (-3.3%) are absurdly low. Since the BoC resisted raising rates to cool inflation or keep up with the bond market, it formed a massive market inefficiency. This is about as close to free money as people can get.

Canadian Real Variable Rate Mortgage Cost

The inflation adjusted average rate of interest for insured and uninsured variable rate mortgages.

Source: Bank of Canada; Better Dwelling.

Typically elevated inflation would drive fixed and overnight rates higher, throttling credit. Since variable-rate mortgages haven’t moved, people have shifted their borrowing patterns. Variable-rate mortgage debt began to outpace the growth of fixed-rate debt for the first time in years.

This is one of the reasons Canadian banks have said the BoC produced a mad panic to borrow. The market naturally cools credit losses by pushing rates higher as inflation rises. The BoC essentially made the last call for cheap debt while there was little inventory.