This year we celebrate Canada’s 150th birthday as a sovereign modern-day democracy, favoured with a very high standard of living and a rock-solid reputation, at home and abroad. In fact, Canada ranked number one in the world for 2017 according to the reputation institute (Global News). One of the three pillars of the reputation ranking criteria is an “advanced economy.”
Economic strength is great news for our country as it generally means job gains and prosperity, adding to the flavour of celebrations happening across our land this summer; however, a rebounding economy also puts upward pressure on interest rates, with implications for mortgage holders, and those looking to get a mortgage, renew or refinance their current mortgage.
Rebounding Canadian Economy Putting Upward Pressure on Interest Rates
The Canadian economy is indeed gaining ground, as we continue to rebound from the global economic crisis of 2008 and the oil shock of 2014, which was especially challenging for our resource-rich economy.
Canada’s central bank has done its part by keeping its key lending rate at an extremely low 0.5% for the past two years, and only a bit higher in several previous years. Our economy is now doing so well that, on July 12, 2017, and after considerable speculation in the preceding weeks, the Governor of the Bank of Canada, Stephen Poloz, announced the first rate hike in seven years:
The Bank of Canada has raised its key interest rate as expected to 0.75 per cent — the central bank’s first move upward in the cost of borrowing in seven years… In a statement accompanying the rate decision, the central bank said the Canadian economy has been robust, fuelled by household spending. – CBC
Canadian Inflation Still Below Bank of Canada Target Levels
The rate increase was announced even though inflation is lagging below the central bank’s stated target of 2 per cent:
A softer-than-expected inflation report [June 23] led some analysts to believe the bank might wait until the fall or later before introducing a rate increase. – Toronto Star
Addressing the issue of a lagging inflation, Poloz further stated that:
It is worth remembering that it can take 18 to 24 months for a monetary policy action to have its full effect on inflation. This means that central banks must target future inflation by anticipating future deviations from target. – CBC
Oil is Up & Canadian Dollar Hits Two-Year High Following Rate Hike
Oil prices are still struggling with over-supply issues, but have risen considerably in recent weeks, currently hovering around $50 USD per barrel. The Canadian dollar also shot up sharply after the Bank of Canada rate increase, trading at over $0.80 USD for the first time in 2 years. These two important indicators convey a positive outlook for the Canadian economy, but also increases the prospect of a further rate hike by our central bank, later this year:
The Canadian dollar strengthened [July 28] against its U.S. counterpart, as stronger-than-expected growth in the domestic economy supported expectations for another interest rate hike from the Bank of Canada in the coming months – Financial Post
Low Inflation in U.S. Good News for Fixed Mortgage Rates
The U.S. is also experiencing a lower than expected inflation rate, which could be good news for fixed mortgage rates in Canada:
The Fed’s last policy statement flagged concern over a recent fall in the Fed’s preferred measure of inflation to 1.5 per cent. – Globe in Mail
It appears that the U.S. Fed may have been hitting the gas a bit too hard, as it has already raised its key rate twice this year. Lower than expected inflation, in the U.S., coupled with low interest rates globally (with negative rates in Japan and Europe) are placing additional downward pressure on the U.S. Fed, which kept its key lending rate unchanged last month, and the U.S. bond market, which dictates fixed mortgage rates in Canada.
Variable Mortgages Rates in Canada are Increasing
Canada’s big five banks all raised their prime lending rates following the Bank of Canada rate increase in July, having a direct effect on variable mortgage rates in Canada. Home equity loans and lines of credit were also affected, as the interest rates for these financial products are primarily based on our central bank’s overnight lending rate.
Other types of loans, such credit cards, automobile loans and student loans will remain largely unaffected as most loans in these categories have fixed interest rates.
The pain around a Bank of Canada rate increase will be sharply felt by some homeowners. A recent survey by Manulife Bank of Canada concluded that:
Overall, nearly one quarter (24 per cent) of Canadian homeowners reported they have been caught short in paying bills in the last 12 months. The survey also revealed that 70 per cent of mortgage holders are not able to manage a ten per cent increase in their payments. Half (51 per cent) have $5,000 or less set aside to deal with a financial emergency while one fifth have nothing. – Manulife
For some variable rate mortgage holders, the Bank of Canada rate increase in July, of just 0.25 of a percentage point, could constitute a 10 per cent increase in their mortgage interest payments.
Hatch A Plan to Save on Mortgage Rates
At Hatch Online Mortgages. We’re well aware of the fact that changing economic conditions can have a direct impact on your mortgage. Our Mortgage Broker-of-Record, Dan Martel (a.k.a. Papa Bird), will help you determine the right kind of mortgage options for your particular financial needs, in the context of prevailing mortgage market conditions in Canada. Since we process the majority of our mortgage applications online, we save on overhead and can pass these savings onto our valued mortgage clients by offering some of the most competitive mortgage rates available across Canada.