Where are mortgage rates going?


– What may we expect interest rates to do in the mortgage market over the next 1-3 years, from fall 2002 to fall 2005? Is it best to lock in or to keep an open variable rate?

Or are interest rates expected to be volatile and unpredictable so as to make it too risky to go with an open mortgage? If mortgage rates are predicted to go up, are they expected to go up over 6.5%? – V.L.


– No one can make predictions like this with any degree of certainty. There are too many unknowns. My guess, however, is that mortgage rates will be higher than they are today by the fall of 2005, perhaps substantially higher. My reasoning goes like this:

We are going through a time of economic upheaval. World economies are weak, with Canada almost the sole exception. In this country, our economic strength has surprised most experts and has already prompted the Bank of Canada to raise interest rates three times this year. In contrast, the U.S. has kept its rates flat, and there is a possibility they could move lower before year-end.

A stronger economy leads to higher rates – the two follow like night and day. If we assume that the U.S. will lead theest of the world out of this slump starting some time in 2003, then it stands to reason that we should expect to see interest rates rise there and elsewhere. The extent and duration of such increases will depend on general economic conditions and the prospects for inflation.

Once a recovery takes hold, it is likely to last from 2-5 years, at least. So by the time we reach late 2005, we would expect to be well into a new boom cycle, with much higher rates than today. How high? Who can say?

Of course, if the recovery doesn’t materialize that quickly, and there are certainly scenarios in which it could be delayed, then rates will stay low for several years.

So where does that leave us? My advice remains the same as it has always been. Take the mortgage with the lowest available interest rate. Then calculate how much you would pay each month if you had chosen a five-year rate and set your payments at that level. The extra money will go to reducing your principal, rather than adding to the bottom line of your lender. – G.P.