Last Wednesday, the Bank of Canada (BoC) raised its overnight target rate to 1.5% – up from 1.25%. This is the fourth increase since last June, when the target rate was 0.5%.
The timing is suspect to me. Last year, we had an increase around this time, but that was coming off of the hottest housing market in 29 years. We’re currently on the heels of a brutally slow spring market, yet rates are still rising? I don’t get it… this is a poor decision, in my opinion.
When it comes to four rate increases in the past year, there are facts, realities and perceptions that come into play…
The BoC is using old facts to justify this fourth rate increase. This has pushed up lending costs for commercial businesses and consumers who borrow based on the bank Prime rate.
Variable-rate mortgages got a little more expensive. A good variable rate is anywhere between Prime minus 0.65% and 1.19% . For some of us in a variable rate, we could be seeing our mortgage rate just above 3% for the first time in almost 10 years! That’s right, if you were in a variable-rate mortgage for the last 10 years, you probably don’t know what a mortgage rate above 3% feels like. But, feel good, because you’ve done very well!
The immediate reaction will be to consider locking into a fixed rate. This is a bit of a knee-jerk reaction, or human nature, but it’s important to stop, pause and reconsider. The bank Prime has increased 1% in 12 months. It simply can’t increase at this pace moving forward. Our economy cannot handle it. Period.
It’s also important to know that, when bank Prime goes up, variable-rate products get priced even better. A look back to 12 months ago shows we had variable rates of Prime minus 0.50%, which were considered good. This year, we’ve seen new variable-rate offers of Prime minus 1% and even minus 1.09%, in some cases! Don’t do anything without speaking with an experienced mortgage broker who is neutral… not a bank employee.
Last rise of 2018?
After this bold move, I don’t see any further rate hikes this year. And, we should watch carefully how this will affect the economy, housing market and jobs. We’re heavily reliant on jobs and spending when it comes to maintaining a healthy housing market.
What’s happening to the Canadian dream?
Homeownership is part of the Canadian dream… yet, we’ve seen homebuying programs disappear. Our government doesn’t want the liability of paying out on possible defaults and losses. This all sounds good in theory but, in 1990, the federal government wrote huge blank cheques to the Big Five Banks to take over the mortgage loans of the smaller financial institutions, virtually guaranteeing no losses to the big banks at the tax payers’ expense.
I remember when Central Guaranty Trust – the biggest trust company in 1990 – was taken over by TD… with a government guarantee of $5 billion against any losses. CMHC may not have been involved, but the government was still responsible.
No need to panic!
I don’t think we’ll see a big bust or collapse in the housing market – just the usual summer slowdown. No need to panic. But, Mr Poloz has to stop rocking the boat at a time when it’s not needed. This latest rate hike could have easily waited until fall.
With a slower summer expected, homebuyers should watch for some deals and those looking to sell should wait until mid-September to put their homes on the market.
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Steve Garganis: 416-224-0114; firstname.lastname@example.org
As an industry insider, Steve will share info that the BANKS don't want you to know. Steve has appeared on TV's Global Morning News, CBC's "Our Toronto" and The Real Life TV show. He's also been quoted in several newspapers such as the Globe and Mail, The Toronto Star, The Vancouver Sun, The Star Phoenix, etc.