Rate Update – New Mortgage Rules Change The Game

As expected the Bank of Canada (BOC) kept the prime interest rate the same. With the new mortgage rules brought in by Finance Minster Bill Morneau, the BOC’s job just got 1000 times simpler and they now have the luxury of keeping interest rates low for an extended period of time.  In their statement issued this morning,  the BOC feels that mid 2018 is when the economy will return to full capacity – meaning this would be the earliest they would start to consider to increase rates.  This is good news for variable rate mortgage holders which I’ll discuss below.

The good news in the announcement was that there are signs of global growth is improving and the US economy is looking stronger, with employment figures improving and consumer confidence increasing.  Both signal that an interest rate increase from the Federal Reserve is getting closer.   When that happens, it could have a spiller over effect and impact fixed rates in Canada.

Key Points From The Bank of Canada Announcement

• Prime rate not changed
• US economy showing signs of growth
• Canadian economic growth lower than previously projected
• Bank of Canada expects to start raising rates by mid 2018

How Your Mortgage Is Impacted

• Prime rate remains at 2.7%
• Fixed rates starting to rise due to mortgage rule changes
• Variable mortgage rates expected to stay the same until mid 2018
• Rate holds for purchases or maturities now available until February 2017 !!

Where are rates heading?

Our interest rate crystal ball shattered on October 4th with the announcement of the new mortgage rules.  Whereas before we could base our forecast on what was happening in the economy, we now have to take into account the impact of the new rules on how lenders get money for funding mortgages. I would expect to see fixed rates rise as the increased funding costs incurred by the lenders are passed onto the consumer – this past week we have seen a few lender close off their rate specials for mortgages closing in less than 45 days.  Until the banks can get a clear idea of what these changes are going to cost them, any decrease in the cost of borrowing is not going to be passed onto the consumer.

What about variable mortgages?  If you are currently in a variable rate mortgage you are in the perfect spot since the BOC will not be changing rates until 2018.  If you are considering a new mortgage, at this time it still makes sense to go with a 5 year fixed.  Once the fixed rates start increasing we will re-asses the break even point and let you know if taking a variable mortgage is the best option from a risk/reward perspective