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Photo: James Bombales

It’s very unlikely mortgage rates will “skyrocket” in the coming years, says Desjardins, but in a recent report the credit union suggests borrowers brace for rates nearer 5 per cent by 2019.

“A widespread increase in interest rates is to be expected over the next few years if the economic expansion continues in North America,” warns Desjardins Senior Economist Mathieu D’Anjou in an Economic Viewpoint report published this month.

“The extent of the rise will depend primarily on how long it is before the next economic slowdown,” he adds, noting Desjardins’ “base scenario only suggests a slight increase.”

D’Anjou notes that the neighbouring US economy — stateside developments have numerous implications for Canada — has been on an upward swing since the Great Recession, and that’s “a long time from a historical point of view.”

This supports predictions for a 2019 slowdown, which provides the basis for the “base scenario.”

It’s a scenario that sees the Bank of Canada hike the overnight rate (currently at a historically low 0.5 per cent) next April by 25 basis points on the back of a still-strengthening economy. That would be followed by similar-scale hikes in October that year and early 2019.

The overnight rate influences variable mortgage rates (here’s how), and the central bank meets eight times each year to consider policy change.

As a result of projected hikes, then, variable mortgage rates would rise correspondingly by 0.75 per cent by 2019, Desjardins suggests.

Over that same 2017-2019 period, five-year fixed rates, which reflect “the financing costs of financial institutions” and are normally tied to five-year federal yields, would climb 1 per cent.

Bond yields over this period would rise gradually amid increasingly consumer confidence and the Fed tightening its monetary policy.

D’Anjou entertains the possibility of the North American economy growing moderately through 2021, rather than slowing in 2019.

The influence on Canadian policy would come by way of continued rate hikes of 50 basis points each year from 2019 to 2021, on top of forecasted central-bank action in the preceding years.

In this scenario, variable and five-year fixed rates could climb by as much as 2 per cent.

Currently, the prime rate in Canada sits at 2.7 per cent and Desjardins says consumers can obtain a five-year mortgage rate under 3 per cent, despite higher official rates thanks to increasingly popular “promotional rates.”

“We must admit, however, that it’s always difficult to forecast turnarounds in the economic cycle and it has become even harder in a context in which the 2008 crisis changed many aspects of the global economy.”

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