|There’s good news on the interest rate front. In the Bank of Canada’s (BoC) most recent announcement it maintained its prime rate at 1%, however with one slight difference. Since 2012, the BoC’s report has included a tightening bias, warning Canadians that rates would soon rise. That bias was removed from BoC Governor Stephen Poloz’s recent report. Instead he is planning to hold the interest rate at these low levels at least into 2015. The reason? Low inflation and a slow economy. Inflation is sitting just above 1% (the BoC likes it near 2%) and annual economic growth is limping along at 1.6%. Also, softer-than-expected economic growth in the U.S. also contributed to the decision. The BoC likely won’t move its rate until the U.S. Fed moves its rate, which is not expected until 2015.
Over time, that tightening bias became irrelevant to borrowers who just ignored the warnings and carried on business as usual. That’s when the Minister of Finance Jim Flaherty stepped in and started making changes to the mortgage rules by reducing amortizations, eliminating insured Home Equity of Lines of credit, changing qualifying ratios, etc.
It looks as if we might get some mortgage rule changes again. Since the BoC has not been able to raise rates nor curb spending in the housing market – sales in many markets continue to grow and house prices continue to rise — the only way the Government can control the housing market is by making changes to the mortgage guidelines. Finance Minister Flaherty recently said he was looking at the housing market, and talking to industry insiders but will not interfere just yet. What we have learned over the past five years is that “just yet” certainly means “it may be coming sooner than you think.” If, and that’s a BIG IF, they believe that home prices are continuing to escalate out of control, and the housing market is overheating, they may act.
But for now, lets’ look at what’s happening. Earlier this year, when it seemed that the end of our low-rate environment was near, bond yields spiked, which led to an increase in fixed rates, but over the past few weeks, those yields began to taper off. If yields continue to fall, or even if they stay stable for a period of time, we may see some reductions in fixed rates yet again. This is welcome news for many.
Variable rates are near prime-0.50% and the trend is towards bigger discounting. Now that the BoC has said there won’t be an increase until 2015, then variable-rate mortgages will likely become more popular.
Over the next few weeks I will be watching the housing market activity in Canada to see if it is indeed tapering and also to watch the impact if fixed interest rates do drop.
As always, if you have any mortgage questions and/or concerns, feel free to contact me.