Dave Larock in Interest Rate Update, Mortgages and Finances
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The Canadian economy continues to defy expectations.
Last Friday we learned that Canadian GDP grew by 0.6% in May, three times the consensus estimate of 0.2% for the month. It now looks as if our second-quarter growth rate will come close to matching the 3.7% rate we saw in the first quarter (which led the G7 countries).
Last month’s growth surge was broad based, with increases recorded in fourteen of the twenty sectors tracked by Statistics Canada.
The Bank of Canada (BoC) has expressed increased confidence in the strength of our economic recovery, and the latest GDP result bolsters that view. It also raises the odds that the BoC will increase its policy rate by at least another 0.25% before the end of this year, thereby eliminating the 0.50% in emergency rate cuts that the Bank made in 2015 as oil prices plummeted.
Interestingly, while Government of Canada (GoC) bond yields initially surged higher on the news, they actually closed lower by end of day on Friday. While that may seem counterintuitive, because bond yields should rise if investors expect higher interest rates in future, here are some of the factors that may have contributed to that outcome:
Five-year GoC bond yields rose twelve basis points last week, closing at 1.64% on Friday. Five-year fixed-rate mortgages are still available at rates as low as 2.64%, and at rates as low as 2.79% for low-ratio buyers, depending on the size of their down payment and the purchase price of the property. Meanwhile, borrowers who are looking to refinance can find five-year fixed rates in the 3.04% to 3.09% range.
Five-year variable-rate mortgage discounts remain largely unchanged and are still available at rates as low as prime minus 0.90% (2.05% today) for high-ratio buyers, and at rates as low as prime minus 0.75% (2.20% today) for low-ratio buyers, again depending on the size of their down payment and the purchase price of the property. Borrowers who are looking to refinance should be able to find five-year variable rates around the prime minus 0.45% to 0.70% range, which works out to between 2.25% and 2.50% using today’s prime rate of 2.95%.
The Bottom Line: Our surging economic growth makes it increasingly likely that the BoC will raise its policy rate by another 0.25% in the coming months. That said, each time the BoC raises while the Fed stands pat, it lowers the odds of additional rate hikes, for the reasons outlined above. In summary then, while our fixed and variable mortgage rates may continue to rise in the near future, I believe that it is still unlikely that they will move materially higher over the medium term.
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