Bank of Canada Rate Increase 07/12/2017

As I’m sure many of you have heard, for the first time in 7 years the Bank of Canada has raised its key lending rate by 0.25%, which ultimately impacts variable rate mortgages & lines of credit, as prime rate will go up accordingly. This increase comes at a time when Canada is experiencing the lowest inflation level in nearly 20 years & in that sense, this move breaks from tradition. It is clear the Bank of Canada wants to raise rates pre-emptively to try claw their way out of this ultra low rate environment they have created & regain some ammo while they can before another slowdown hits the economy.

What does this mean to you? With the exception of one instance in the late 80s, the variable rate has always been a cheaper path than the 5 year fixed. While you do have the option to “lock in” to a fixed rate, you would be doing so into a higher rate & payment than you have currently.

Those riding the variable rate train have benefitted from some of the lowest interest rates in Canada’s history over the past 9 years. While, psychologically, a rate increase can drive many to panic, keep in mind that a 0.25% increase in rate translates to $12 / month for every $100k of mortgage (amortized over 25 years). In 2010 prime rate rose to 3%, remained there for 4½ years then dropped to 2.7%.

One of the greatest benefits of a variable rate mortgage is exit strategy as the penalty to break the term is just 3 months of interest. Under that light, a fixed rate mortgage can often be riskier path. If there is any uncertainty over the remainder of your term, this is something I urge you to weigh heavily.

There is no shortage of uncertainty in our world right now, both politically & economically. Central banks around the world find themselves in the extremely difficult position of needing to unwind their balance sheets & raise interest rates at a time when core measures are not exactly strong. The deflationary headwinds outweigh the tailwinds in my view so until there are greater reasons for optimism, my advice is to stay the course.

If you have any questions at all, please do not hesitate to get in touch.

Bank of Canada Rate Announcement

April 15, 2015

Following today’s Bank of Canada’s announcement that it will hold overnight rates steady at 0.75%, Dominion Lending Centres’ Chief Economist, Dr. Sherry Cooper, says the outlook is unclear for the Canadian economy and the prospects for a potential rebound in the second half of 2015 are still uncertain.

The Canadian economy has experienced a substantial slowdown in recent months due to drops in the price of oil, and Dr. Cooper expects that any changes to the nation’s economic performance will likely be a result of an improvement in non-energy sectors emanating from the weakness in the Canadian dollar.

“While March employment in Canada improved substantially, business investment remains disappointing,” added Dr. Cooper. “The Bank of Canada has suggested that we will see a transition towards positive growth in exports and capital spending by non-energy producers—both boosted by the depreciating Canadian dollar, but in the near-term, incoming data will likely confirm continued weakness in the manufacturing sector, particularly in autos, and only modest growth in retail sales.”

Dr. Cooper reiterated her confidence in the Bank of Canada’s monetary policy strategy for 2015, despite the current weakened status of the Canadian economy: “I am cautiously optimistic that the Bank has got it right, but I continue to believe that the risks are on the downside for the economy and inflation. My forecast for Canadian growth this year is 1.5 percent–below the Bank’s 1.9 percent forecast. Much hinges on the U.S. economy.”

 

Ryan Zupan
Mortgage Planner
604.250.6122
[email protected]