Canada is one of the leading producers of natural resources such as oil. Many countries depend on us for our vital resources to fuel their growing economies, but this also means that we are vulnerable to downturns in the larger economies of countries, which import our oil and other resources, such as China. This past year’s dramatic and consistent drop in the price of oil has been particularly hard on the Canadian economy, but on the plus side has helped anyone shopping for a mortgage, by driving interest rates to record lows.
We’re Now in a “Technical Recession”
At the beginning of September, Statistics Canada announced that we are in a “technical recession,” meaning that our economy, as measured by GDP, shrank in two consecutive quarters (for the first time in 6 years). In July, the Bank of Canada did it’s part to stop the bleeding and stimulate our economy with another cut to it’s key overnight lending rate, dropping it to 0.5%. Since this rate affects their cost of borrowing, the big banks typically follow suit, thus passing these savings on to consumers in their prime rate; however, rarely do they pass on the full savings.
Banks Don’t Pass Full Effects of Rate Cuts on to Mortgage Holders
Within minutes of the central bank’s cut in July, TD announced that it would be dropping its prime lending rate, but nowhere near to the same degree as the Bank of Canada:
TD’s cut was initially only 10 basis points lower than it had been, not a 25-point cut that the central bank announced. TD had pocketed a similar amount when the central bank cut its rate by 25 points in January, passing on only 15 basis points to its customers. Later in the day, however, Royal Bank, the Bank of Montreal, CIBC and Scotiabank all announced they were decreasing their prime lending rates by 15 basis points to 2.7 percent from 2.85 percent, effective July 16. TD eventually followed suit, matching the other banks at 2.7 percent. CBC News
This situation is similar to consumer savings on gasoline, when the price of oil drops. We all know when oil has dropped, but rarely does this reduction result in a quick or proportional reduction in what we pay the pumps. Each gas station is watching its close competitors to see how low the next guy is going to go, and then changing their prices more or less in step, but always keeping their own margins in mind, meaning that automobile owners need to be vigilante as to where they fill up.
Mortgage Applicants Need to Shop Around
Equally, homeowners looking to get a new mortgage, renew or refinance, must pay careful attention to what various lenders are offering in terms of rates, and also in terms of mortgage products. For example, mortgage prepayment penalties, which come into play when you switch lenders, can vary greatly depending on whether it is the posted rate or the discount rate that your current lender uses to calculate the interest rate differential (IRD); a difference that can impact you by thousands of dollars.
Our super-low mortgage rates won’t be around forever, but they are here to stay at least in the short term, as the Bank of Canada left it’s 0.5% overnight rate unchanged last month, citing uncertainty in the volatile international commodities market:
Canada’s resource sector continues to adjust to lower prices for oil and other commodities, with some spillover to the rest of the economy. These adjustments are complex and are expected to take considerable time… Movements in the Canadian dollar are helping to absorb some of the impact of lower commodity prices and are facilitating the adjustments taking place in Canada’s economy. While the overall export picture is still uncertain, the latest data confirm that exchange rate-sensitive exports are regaining momentum. Bank of Canada
As The Economy Picks Up, Mortgage Rates Will Likely Rise
The Bank of Canada’s prediction that our economy is now in a rebounding phase was affirmed by the latest GDP numbers, released at the end of September, indicating that our economy grew by 0.34% in July, building upon similar growth of 0.44% in June. Our lower Canadian Dollar, which is influenced by the Bank of Canada cut in July, is helping to fuel the recovery with increased exports, coupled with an uptick in consumer spending:
“This rebound from the weak growth over the first half of the year reflects in large part strengthening exports and consumer spending starting to more than offset continued declines in energy investment,” said Royal Bank of Canada assistant chief economist Paul Ferley in a research report. Globe And Mail
Many economists are now predicting increased GDP growth in the third quarter of this year, in the neighborhood of 2.5-3%. If this pans out, our Central Bank will be under pressure to increase it’s key rate, which could likely result in higher mortgage rates, and at a faster and more proportionally degree than the rate cuts this year… similar to how gas prices at the pumps seems to rise faster and more proportionally when the price of oil increases.
Get Hatch in Your Corner
As a full-service mortgage broker, based in Ottawa, Hatch can shop around for the best rates from a wide range of lenders, which aren’t always prominently advertised. We can also explain the differences between various mortgage products, including nuances that aren’t so easy to decipher, but can have a significant impact on what homeowners pay. We like to keep things easy and simply, so you can also apply for your mortgage online at your own convenience.