Rate Update – Hazy Expectations
May 29, 2019
Rate Update – Last One For The Decade
December 4, 2019
As expected, the Bank of Canada (BOC) left the prime rate unchanged today. Not a big surprise given the recent strong employment figures.
Reading between the lines of the BOC announcement, you can’t help but get a sense that the Governor feels like he is walking through a haunted house. He can sense that something is around the corner that’s going to make him jump in fright. The question is how high.
Something bad is coming? I don’t get it you say! What about the all positive economic news – unemployment at 40 year lows, we are starting to see wage growth and housing sales have picked up?!
The problem is there is a trifecta of events potentially lurking around the corner in the Canadian Economic Haunted House. And it has the Governor tensed up like Tigger ready to jump.
So what does that mean for your mortgage? Scroll down to find out how we connect the dots.
Key Points From The Bank of Canada Announcement
- Prime rate remains unchanged at 3.95%
- Global Growth Expected To Slow
- US/China trade impacting business investment
- BOC keeping a watchful eye on Housing Prices
How Your Mortgage Is Impacted
- Fixed rates increasing due to positive economic numbers
- Bond Yields have increased, but might level off
- Rate holds available until just past Valentines Day!
What does this mean for your mortgage?
As I was writing the update this morning I was continually saying to myself I don’t get it, why is the BOC worried? And the even BIGGER question: if the BOC is worried why are interest rates increasing?
Let’s start with the BOC. The reason they are worried is uncertainty.
Yes, we have a record number of jobs being created every other month and yes, we are finally seeing some semblance of wage growth, and yes housing sales are increasing. The fact is that the the US/China trade wars, Brexit and the Mortgage Stress Test are the mean kid stealing everyone’s economic Halloween candy.
With the Trade Wars and Brexit, businesses are not going to deploy capital since there is a high probability that it won’t yield a decent return. Just the simple act of buying back their owns shares in the open market could yield a higher probably return that jumping into this economic fog.
As for the consumer, they are now seeing the effects of eating too much halloween candy ( cheap credit ) and realizing it might be time to change their household diet ( going on family budget ). And when you factor in that big Black Cat that keeps walking in front of their house ( the stress test ), all of a sudden that special feeling we have from the realization that we live in one of the most beautiful cities in the world, feels threatened. All funny metaphors aside, when you mess with the value of someone’s home, they stop spending money.
Those two factors are the main reason why inflation is not climbing.
Nice story! So why are rates rising?
As previously blogged about, mortgage rates are tied to bond rates, and bond rates look to inflation for guidance. All the current economic news speaks to inflation. Compounding the rise in bond yields is the fact that the stock market has turned a corner that has technical analysts very excited. Et voilà – presto, you have conjured up an environment for higher rates.
Having said that, the zombies are coming. And when they do, everyone will be running to back to their bond shelter for safety.
The Bottom Line:
So with the above in mind what are we advising our clients?
- Consider a variable rate mortgage:
- If you haven’t already secured an interest rate and have a maturity coming up, this might be a good option.
- The strategy here would be to make a switch to a fixed product if the spring brings some rate specials from the banks.
- The good news is with most lenders allow you to go from variable rate to fixed rate without a penalty, providing you take a term that is equal or longer than the remaining time left in your variable term.
- Consider a hybrid product:
- If going with a variable doesn’t feel comfortable there are other options.
- We have access to products where we can split the mortgage between fixed and variable which gives you a balanced approach to managing your interest rate.
- Fix it and forget it
- If you like to keep things simple we do still have access to some great interest rates.
- This is ESPECIALLY true if you are coming up for renewal.
As we always say, focus on your life goals first, then the mortgage product and then the interest rate. This will make sure you get the best mortgage for your current and future financial situation.
Happy Halloween … I hope I didn’t scare you with the update!
Do you have a mortgage maturing near Valentines day? We would LOVE to help if you do!
**Ask me how you could potentially avoid the Stress Test!**
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