Rates are going up… for now… is this the end of low rates?

 Next Wednesday will be the first Bank of Canada meeting date to set the Target rate, which directly affects Bank Prime rate and Variable rate mortgages. It’s almost a certainty that the Bank of Canada Governor, Stephen Poloz, will raise the rates.

POSITIVE DATA MEANS HIGHER RATES

There’s been too much positive economic data lately. Low unemployment levels (5.7%, the lowest since the ’70s), higher spending by consumers, slightly higher inflation (2.1%), record level stock market. We’ve also seen some comments and posturing by the Bank of Canada Govr that suggests we should expect a 0.25% increase.

Bond yields have also been moving steadily upward. Yup, we should expect a rate hike. And depending on how the market reacts to this, we could possibly see another rate hike at the next Bank of Canada meeting on March 7th.

BUT WAIT, IS THIS THE END OF MORTGAGE RATES IN THE 3.00%’s?

This article is your notice that rates have gone up over the last 4 months and will continue to climb for another 4 to 6 months. However, it is not a forecast for runaway rates. Let’s make that clear. I still believe that interest hikes should be minimal.

There are many unknowns and negatives that have yet to play out.

• The new mortgage rules or ‘stress test’ as our govt likes to call it, has just come into affect. We won’t know how much impact this will have until around April or May.
• The new minimum wage hike just started and as you have probably heard, it’s already being met with a lot of emotion (I find it incredibly naive of the govt to expect business owners to just magically absorb a 25% to 30% hike in payroll.. like money was just sitting idle in the owners pockets).
• There’s a general rule with interest rates. When the economy is good, interest rates go up, when the economy is bad, interest rates go down. They go down to stimulate the economy. In case you haven’t heard, we are under attack by the US. Yes, President Trump (is it just me or does that hurt to say that?) has made it clear, America first, the rest of us can go (ahem) ourselves.
• Bank of Canada issued a report stating we can expect Ontario to lose 60,000 jobs due to the new minimum wage increase.

Add it all up and you have uncertainty in the future. Uncertainty breeds lower rates. Maybe not this month or next, but I believe there could be something looming in the air come Summer or Fall.

DON’T BE SO QUICK TO OPT OUT OF VARIABLE RATES…

For these reasons and more, I still like Variable rates over Fixed. This is not to say that Fixed rates aren’t a good option for some.  If you are on a tight budget and cannot stomach some rate fluctuations, then go with fixed. But if you understand historical rate trends, if you’ve been in a Variable rate over the last 3, 5, 7, 10, 15, 20 years or more, you’ll know that Variable rate outperforms fixed rate in over 80% of the time.

Add in that the prepayment penalties on fixed rate mortgages are now averaging 6 to 10 months interest with any of the BIG SIX BANKS, and Variable rate becomes a no-brainer. It’s NOT just about the interest rate.. You MUST look at all the other costs involved and related to taking and disposing of a mortgage. HERE is where the informed consumer will shine. Here is where consumers can save or lose.

There’s a reason the higher income and net worth individuals prefer Variable over Fixed..

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis 416 224 0114 steve@canadamortgagenews.ca