Why didn’t the Bank of Canada Gov cut rates last week?

WAS THIS A BIG MISTAKE?

Last week, Stephen Poloz, the Bank of Canada Governor, kept the Prime Rate as is during the 6th of their eight scheduled meetings for 2019.  The Current Target rate is 1.75%.  (Bank Prime rate is derived from this rate.  Today’s Bank Prime rate is 3.95%.  Over 99% of time, when the Target Rate is cut, the Banks will reduce the Bank Prime Rate by an equal amount).

This was a very calculated decision that has politics written all over it.  While the rest of the world banks have been cutting rates to combat a looming recession due to growing global trade wars and slowing global economies, our Government did nothing.  Apparently, the Canadian economy is ‘resilient’.  The next Bank of Canada meeting is set for October 30, 2019.  Oh, and there’s a Federal election on Oct 21, 2019.  Yeah, this has politics written all over it.

WHAT YOU SHOULD KNOW ABOUT MORTGAGE RATES TODAY. 

Here’s a quick lesson on how mortgage rates are usually priced.  Normally, the longer the term, the higher the rate.  Fixed Rates are normally priced higher than Variable Rates. But since January 2019, we have seen longer terms, such as 3, 4 and 5 year terms, priced lower than shorter terms.  Additionally, Variable Rates have been higher than even 5 year fixed rates.  This is known as an inverted yield curve.

This has caused a lot of concern by some of the brightest economists and policy makers.  Historically, an economy will slow or go into a recession within 6 to 18 months of an inverted yield curve.  Yet, our Bank of Canada Governor Poloz, did nothing.

MY TAKE ON RATES….

This is gonna buck the current trend, however, I think you should still consider taking a Variable rate mortgage today.  Yes, a Variable Rate!  Even though current Variable Rates are priced from around 2.85% to 3.30% (depending on the purpose of your mortgage) and 5 year Fixed Rates are priced from 2.69% to 3.09%.

If history repeats itself, and it usually does, then we should expect to see one, possibly two rate cuts into 2020.  While that may not give you a much lower interest rate than today’s 5 year Fixed Rate, a Variable Rate mortgage gives you the option to lock into a Fixed Rate at any time, at the then current interest rate; if rates are further reduced, you could certainly benefit.  In addition, if you need to get out of your mortgage for any reason, your penalty will be capped at 3 months interest rather than an Interest Rate Differential (IRD) calculation which could end up costing you 8, 10, and even 12 months of interest penalty (yeah, penalties are the big hidden cost that no one thinks about).   This is something that you must consider given the statistics; statistics show Canadians change their mortgage every 3 years.  Every 3 years!  The reasons are endless, ranging from employment changes, financial position (more money, less money), marital status change, health issues, etc.   Whatever the reason, we seem to make a change every 3 years on average.

REAL ESTATE MARKET IS HOT AGAIN..

The statistics will soon be coming out so don’t be surprised to see an active resale market for August.  My conversations with senior management at most financial institutions indicate a higher than normal volume of mortgage applications.  This is due in part to interest rates being below 3.00%.   Affordability has improved significantly just based on the lower rates.  Mortgage rates are down approximately 1.00% since January 2019.

BOTTOM LINE THOUGHTS..

We’re all gearing up for a slowing economy. Although he didn’t press the panic button, CIBC World Markets Economist, Avery Shenfeld, put out a forecast last week about the slowing economy.  He said we are set for a period of lacklustre growth for 2020 with an anticipated recovery in 2021 as trade tensions should have eased by then.   That’s actually one of the milder forecasts so let’s hope he is right.

The Toronto and Vancouver real estate markets have recovered and are doing well.  The low interest rates will help to keep the market active into 2020.  If you are looking to buy a property, buy it with the intention of holding for 7 years or longer.  This has been my cardinal rule for buying any real estate.  Keep away from the quick flip deals.  Just unwise.

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@mortgagenow.ca