Dave Larock in Interest Rate Update, Mortgages and Finances
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Canadian economic growth has surged of late.
Our GDP grew at an annualized rate of 2.6% in the fourth quarter of 2016 and last week we learned that it grew by another 0.6% in January. That momentum has economists now raising their GDP growth forecasts for the first quarter of 2017 to as high as 4%.
These recent GDP data contradict the widely held belief that Canadian economic momentum is lagging U.S. economic momentum, and also calls into question the assumption that the Bank of Canada (BoC) will stand pat while the U.S. Federal Reserve repeatedly raises its policy rate in 2017.
The BoC has said previously that it expects our output gap (which measures the gap between our economy’s actual output and its maximum potential output) to close around mid-2018. The Bank would typically begin to raise its policy rate at about the same time that this happens, so the closing of the output gap is a significant milestone for anyone keeping an eye on our mortgage rates.
The question now being asked is: If our economic momentum is accelerating and our output gap closes more quickly than forecast, will our mortgage rates rise more quickly than expected?
There is no one better than BoC Governor Poloz to answer that question, and he did so last week when he spoke at Durham College, in Oshawa (his home town). Here are the highlights from his latest speech:
In summary, Governor Poloz did not sound like a policy-maker who is recalibrating the BoC’s rate-hike timetable in response to the recent improvement in our economic momentum. His comments described our economy as still being in the midst of a long recovery with plenty of room left to grow before it gathers enough momentum to fuel materially higher inflation. Against that backdrop, any near-term change in the BoC’s monetary policy still seems unlikely.
Five-year Government of Canada bond yields fell one basis point last week, closing at 1.12% on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.44% for high-ratio buyers, and at rates as low as 2.49% for low-ratio buyers. If you are looking to refinance, you should be able to find five-year fixed rates in the 2.69% to 2.84% range, depending on the terms and conditions that are important to you.
Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers. If you are looking to refinance, you should be able to find five-year variable rates in the prime minus 0.45% range (2.25% today), depending on the terms and conditions that are important to you.
The Bottom Line: The recent improvement in our economic momentum has some market watchers speculating about whether the BoC may start hiking our interest rates more quickly than expected. But based on his comments last week, and for the reasons outlined above, I don’t think BoC Governor Poloz shares that view. If I’m right, that means that our fixed and variable rates should continue to remain at or near their current levels for the foreseeable future.
David Larock is an independent mortgage broker and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave