Rate Update – All Quite on the Western Front

As expected the Bank of Canada didn’t change the prime rate today. To sum up the Governors statement in a few words, we aren’t out of the woods yet.  

Governor Tiff reassured the markets that he will continue the bond buy back program and reaffirmed that the prime rate will remain as is until there are clear signs we are back on track.  Tiff further added that he expects we’ll see some inflation spikes, however, things will settle down to the normal range of 2 percent shortly after.  It will be interesting to see how the bond market will react when higher inflation numbers start rolling in.

Positive points in today’s press release focused on the US and European economies showing signs of returning to normal, and businesses spending money as they replace inventories.  Though the consumer will be doing most of the heavy lifting with getting the economy back to normal in 2021 and 2022, it’s good to know that businesses are also helping to carry the load.

With no real economic catalysts to spur a change in fixed rates, the potential for the banks to lower fixed mortgage rates is becoming more likely.  The question is will banks do it.  Scroll on down to find out more.

Key Points From The Bank of Canada Announcement

• Prime remains unchanged
• Plenty of employment slack will keep wage growth at bay
• Low rates = higher oil prices to come = stronger CAD
• US and Europe growing but emerging markets holding things back

How Your Mortgage Is Impacted

• Bond Yields have lowered back to the March 2 break out point 
• Fixed rates are stable but could be poised for a slight decrease
• Big Variable discounts are probably going to start disappearing in the next 8 to 12 weeks
• Rate holds available until just before Thanksgiving!

As you know the real estate market has been on fire for the past year.  And as of the end of June, the last of the ultra-low fixed mortgage rates will expire.  This confluence of events has created an extraordinary amount of pressure on the banks during a time that is a business operations nightmare. To compound these compounding issues, the banks are essentially playing double-dutch jump rope with inflation and interest rates.  If they lower rates and inflation shoots up, they could lose their well-pressed shirts given the current volume of business. 

I believe this one / two punch of volumes and the potential costs for banks for funding mortgages is what’s keeping interest rates as is for now.  If we see real estate sales slow to a more normal level, and inflation stays in check I think we could see a 5bps rate decrease in the next 30 days or “quick close” rate specials that mitigate any hedging costs for the bank to hold rates.

Sunsetting on Variable Rate Discounts?

Taking a variable rate mortgage in a time of ultra low interest rates may seem counterintuitive but for the right client, it makes sense.  Now that the gap between fixed and variable rates has widened to almost 1%, the risk/reward ratio firmly supports going with a variable rate mortgage.  Even with the future increases in the prime rate factored in you’ll still be further ahead.  As unlikely as that sounds, it’s because the prime rate is likely to remain unchanged for the next 10 to 12 months.  And when the time comes for prime to begin its ascent, the rate of change in the change of rates will be gradual.  Traditionally the increase prime has been 25bps per meeting, with rarely an increase of more than 3 times in 6 month period.  This means the probability of today’s variable rate mortgage reaching the full rate of a current 5 year fixed before the end of the 5 year term is unlikely.   Even if it did reach the current rate of a 5 year fixed in the 4th year, you would still enjoy 4 years of a much lower rate.

The catch is the large discounts we are seeing in variable rates tend to be short lived.  Looking back at our rates sheets for the past 6 to 7 years the pattern is the deep discounts on variable rate mortgages tend to be around for 4 to 9 months at most.  That means we could see these fantastic variable rates evaporate in the next month or two given that the discounts started rolling in on March 1st.

Not Really Stressed About The New Stress Test

The new stress test is here.  Is applicable to everyone? No.  Here is the list of people who are exempt:

• • You entered into a contract to purchase a property prior to June 1st
  • You are transferring your mortgage to another institution and meet the following conditions:
    • You aren’t adding more than $3,000 to the mortgage
    • You purchased the home before October 2016 and have not taken any equity out after Nov 2016
  • You have a live approval from a lender for a refinance that was submitted prior to June 1st

Will the new stress test slow the housing market?  About as much as a bug hitting your car while driving on the highway.  The good news is the stress test is now decoupled from the posted 5 year rate of the big 6 banks.  Hopefully, this will lead to banks lowering their 5 year posted rates, which should, in turn, ease the massive penalties that the stress test created.  

Bottom Line:

We are at a crossroads – with real estate, with interest rates, and with life.

For many people, these next three months could be life changing.  If that statement resonates with you, please feel free to give me a call.  Having been in the financial business for over 20 years I have been involved in every aspect of people’s lives, the good, the bad, and the ugly.  

If you need to talk, about anything,  I am here.

With Virtual Hugs …

Disclaimer Notice: The views expressed in this blog post are of our opinion. The information has been sourced from the Bank of Canada, and several Canadian news sources. Any forecasts or expectations of the direction of interest rates are based on the collective experience of the Nishka Riley Mortgage Team, and as such any recommendations must be taken within the context of your personal situation. As with any forecast, there is no way to guarantee the outcome of the real estate market or interest rates and in no way is a guarantee implied.