Borrowing Costs Are Increasing

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The Bank of Canada (BoC) is probably going to increase the overnight rate by 0.25% on Wednesday.  This will mean Variable Rate Mortgages will get a little bit more expensive.

The argument is that holding off on a rate hike while wages and inflation are under upward pressure will cause problems down the road. The BoC would then have to raise rates more aggressively to combat an overheating economy if it doesn’t do something now. However with a looming trade war and a Canadian borrower who is now feeling the effects of new policies enacted by the Liberal Government that are giving consumers little choice when it comes to refinancing or renegotiating their mortgage, should we take pause?

Economists are pricing Wednesday’s rate decision at an 80% chance of a rate increase. After that everyone is split as to whether or not rates will increase again this year. The Governor of the BoC has been trying to tell us for some time that he feels the BoC shouldn’t have to telegraph its moves in more normal economic times. So we should expect to get less guidance from him and the BoC on any future moves. He believes that since the decision is based on the data coming out of the economy and that information is available to all, rate increases should come as little shock to those studying the BoC’s moves.

For those of you with Variable mortgages we continue to think that the Canadian economy has too much uncertainty to jump into a fixed rate without considering the downsides. The decision is dependent on too many factors to whole heartedly endorse one product over another right now. For more colour on what the markets are predicting you can look at the yield on the Government of Canada 5 year bonds or even the Canadian Dollar.

Bonds: Yields are up pretty steadily since November 2017 when they were priced at 1.53%, today we sit at 2.075% for the 5-year yield. When you add between 1.25% and 1.4% it should give you a fair pricing for a 5-year fixed rate mortgage. In May, when we weren’t worried about “The Donald” imposing tariffs on us, that yield was almost as high as 2.4%. This should give some comfort to those of you who prefer the variable rate mortgage.

The Canadian Dollar:

The Canadian Dollar can buy you about 76 cents US right now, which is off of the low for the year (75 cents) which we hit a few weeks ago. The increase shows in part that our economy is strengthening. A part of this can also be attributed to oil prices.

Going Forward:

The Canadian economy is growing. Employment and Inflation are being closely monitored by the BoC and both readings make it hard for any central banker to ignore the strong case for a rate increase. The two areas that are definitely giving the BoC second thoughts are:

  1. Canadian Real Estate Prices and Household debt levels.
  2. A Trade War with the US.

Despite the risks these two factors pose to the economy the more immediate concern would be leaving rates too low for too long and having to chase down a runaway economy with more dramatic rate increases.  Each rate hike has an effect on the market and rising on Wednesday will be no different. This move will further telegraph the BoC’s game plan and show borrowers that money is getting more expensive.

This rate hike will certainly not be the only increase in borrowing costs being felt by Canadians. Most of us have already felt the pinch. As we previously mentioned half of all mortgages are renewing in 2018 and Canadian consumers are finding it harder than ever to switch lenders. New underwriting rules and fewer options in the market created by new policies enacted by the Liberal Government are making Banks far more powerful and giving consumers little choice to renegotiate their mortgage. We are finding ourselves far busier than last year as we help our clients navigate the new landscape. There are still some amazing offers out there, but they are harder to find. Artificially increasing borrowing costs on the Canadian consumer will eventually have an impact on the greater economy. As Banks hike their penalties to break their mortgages and change the qualifying criteria on their mortgages to further their borrower’s dependence on them Canadians need to be careful.

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