This post is guest-written by Penelope Graham of Zoocasa.
Good news for borrowers and mortgage holders – after two years of “hawkish” trends, it appears interest rates may be headed lower once again. The Bank of Canada (BoC), which sets the cost of variable borrowing via its trendsetting Overnight Lending Rate, has left this key measure unchanged at 1.75% in its last two announcements, and has strongly hinted there aren’t any hikes in the foreseeable future – perhaps well into next year.
Let’s take a look at the factors behind these latest monetary policy developments, and what they’ll mean for borrowers.
Low Rates Are in Response to a Weaker Economy
A slowing economy, mainly due to weaker oil and housing sectors, is the main impetus behind a lower interest rate environment. Unlike the period between 2017 and 2018, when the BoC hiked its rate a total of five times in response to strong inflation and employment growth, the 2019 economy is off to a quieter-than-expected start. That’s prompted the BoC to “loosen” its monetary policy, aka, keep rates low; this is a tactic used by central banks to encourage borrowing during a downturn, thereby stimulating the economy. The Bank announces whether it is loosening, tightening, or maintaining rates in eight announcements made over the course of the year.
In its most recent April announcement, the BoC stated: “Given all of these developments, Governing Council judges that an accommodative policy interest rate continues to be warranted.” It added that it’s keeping a particularly close eye on household spending, the oil markets, and global trade policy, and their impact on growth and inflation before moving the dial once again.
A Period of Stability for Variable Rate Holders
For variable mortgage borrowers, whose interest rates are directly tied to the direction of the Overnight Lending Rate, no rate movement signals stability, at least in the medium term – when the BoC hikes rates, these borrowers may see their monthly payments increase, or more of that payment going toward interest rather than the principal debt.
And, according to analysts, upward rate movement won’t be occurring any time soon. In a recent poll conducted by Reuters, 40 economists were unanimous in forecasting the April rate would remain untouched, with a full 60% saying the Bank will hold off until at least 2020, when economic factors may improve. However, the revised outlook remains tame, calling for Canadian GDP to grow 1.2% and 2% over the next two, with inflation – the metric that most influences rate direction – to stick close to its 2% growth target.
Lower Bond Yields Pulling Fixed Rates Lower
Another indication that interest rates could be headed downward is that the yields on long-term bonds – the metric that sets the pricing of fixed mortgage rates – have ticked lower.
As the yield – payout – of bonds drops, so too does the financial burden of the lending institutions backing them, a savings spread they then pass down to the consumer in the form of lower-priced fixed borrowing. For example, today’s five-year bond yield has dropped nearly 35 basis points from the beginning of the year, prompting competitive mortgage lenders to discount their fixed-rate offerings below the 3-percentage point.
How Borrowers Can Use This to Their Advantage
The bottom line for borrowers is to understand their options when interest rate trends are in flux; when economic indicators point to dropping or stable rates, it’s a great idea to for new mortgage applications to browse various lenders for the best deals, while existing mortgage holders may benefit from exploring their refinancing options, or their ability to switch to a lower rate upon renewal.
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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 across the nation, from Toronto and Vancouver, to secondary markets such as Hamilton real estate and Burlington real estate. Home buyers and sellers can browse listings on the site, or with Zoocasa’s free iOs app.