This post is guest written by Penelope Graham of Zoocasa.
Good news for borrowers of floating-rate mortgages: The Bank of Canada (BoC), our nation’s central bank, has left its trend-setting Overnight Lending Rate at 1.5% for the month of September, meaning your variable monthly payments won’t change.
That’s because the BoC uses this rate to set the price of variable borrowing for Canada’s big banks; eight times per year, it releases a statement mandating whether variable rates will go up, down, or remain the same.
Controlling the cost of borrowing is a tool the central bank uses to protect the Canadian economy. During a period of recession, for example, the BoC will leave interest rates low to encourage consumers to continue spending and borrowing. In a period of economic growth, it moves rates higher to prevent a surge of debt growth, and to keep inflation in line.
In July, the central bank did just that, hiking its rate a quarter of a per cent to 1.5%. This month, though, it kept things at status quo; while continued uncertainty around Canada’s trade relationship with the U.S. and NAFTA agreement pose risks to our economy, that’s been offset by strong economic performance at home, ensuring economic stability. Inflation surged 3% – the highest since 2011 – in August, as business investment, job and wage growth, and exports all saw improvement.
The BoC also noted that the high level of risky household debt – deemed a main vulnerability to the overall economy – has started to improve. Borrowers are taking less on to buy houses for sale as a result of stricter mortgage qualification rules, and the overall housing market is starting to stabilize as a result.
What does this mean for borrowers?
While the BoC’s decision to leave interest rates where they are means variable mortgage borrowers won’t see any change to their monthly payments, it is highly expected that it will hike its rate again as early as October.
“Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target,” states the BoC’s release. “We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates.”
If you’re a variable-rate borrower, this is a tip-off that higher mortgage payments are coming down the pipe, and that it’s a smart idea to adjust your household budget accordingly.
And, while fixed-rate borrowers aren’t directly impacted by the BoC’s interest rate strategy, they will encounter the residual effects of an overall higher borrowing environment. Because fixed mortgage rates are influenced by the yield coupons on Government of Canada bonds, which are expected to rise following this announcement, those at the renewal or refinance stage may encounter higher fixed rates.
Prepare for a rising rate environment
The bottom line for borrowers is to financially prepare, as higher interest rates will soon be a reality. It’s a great idea to check in with a mortgage professional to confirm that your mortgage product best suits your needs and whether, in a rising rate environment, you should change your strategy come renewal. For new purchasers of homes for sale, ensure you clearly communicate your appetite for risk with your mortgage broker when determining whether a variable or fixed mortgage rate is the best strategy.
Penelope Graham is the Managing Editor of Zoocasa.com, a real estate website that combines online search tools and a full-service brokerage to let Canadians purchase or sell their homes faster, easier and more successfully. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.