Is a two year fixed mortgage rate enough time to allow mortgage rates to drop?
The short answer is that two years is likely enough time to see some drop in mortgage rates, but it is not guaranteed. When we hear the Central Bank of Canada saying higher for longer, and that mortgage rates in general will remain higher for longer, that is coming off the back of an expectation that rates would start falling in early-mid 2024. This was not the case, but the likelihood of mortgage rates dropping in 2025 or 2026 (depending on when you lock in) is far better.
In fact, most economists and the market are pricing Central Bank rate drops in mid to late 2024. This makes sense, given the economic slowdown momentum currently building with already high rates. There is substantial deterioration building in 2024, and as of October 2023 the market is still expecting almost another year of higher level before they start falling.
This seems like a reasonable amount of time for rates to start falling, and in fact, rates could begin falling sooner. Given this rationale, a two-year fixed rate could be the perfect rate to help you renew at a lower rate when rates have fallen substantially.
Will fixed rates start falling sooner than variable rate mortgages?
The short answer is yes. Approximately six months before variable rates start falling alongside the central bank rate crops, fixed rates, priced using Government of Canada bond yields, typically begin to fall because fixed rates fall sooner than variable rates. This bodes well for a two-year term.
Is there any risk of a two year fixed rate?
With any decision, there can be trade-offs. In the case of the two year fixed rate, the rate is higher than a five year fixed rate. So if rates did stay higher for longer, or for example, rates dropped and then went back up just in time for the two-year renewal. Then, you would have paid a higher rate, possibly for no reason.
This kind of situation runs counter to the market consensus. However, there is a chance that it could happen, and this is the main risk of a two-year fixed rate.