Dave Larock in Interest Rate Update, Mortgages and Finances
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All eyes were on Bank of Canada (BoC) Governor Poloz last Wednesday when he spoke at the Board of Trade in St. John’s, Newfoundland.
These were his first public comments since the BoC began to raise its overnight rate in July. Market watchers have been debating whether the Bank would now pause, after reversing the two 0.25% rate cuts that it had made in 2015 in response to the oil-price shock, or continue to raise rates to mitigate against the risk of rising inflationary pressures over the medium term.
The answer to that key question has important implications for both fixed and variable mortgage rates.
If the BoC continues to raise its overnight rate, lender prime rates will move higher in lock step. And since variable-rate mortgages are priced on lender prime rates, additional policy-rate increases by the Bank will immediately translate into higher borrowing costs for variable-rate borrowers.
Fixed-rate mortgages are priced on Government of Canada (GoC) bond yields, and while those yields do not automatically move when the BoC raises its policy rate, they often respond to changes in the Bank’s outlook. This is especially true for longer-term GoC bonds because their extended duration makes them highly sensitive to even subtle changes in the BoC’s views on inflation and growth.
The title of Governor Poloz’s latest speech is “Data Dependence: Economic Progress Report” and that further piqued my interest because in several of my recent blog posts I have made the case that our key economic data should give the BoC pause before it hikes its policy rate further. (In those posts I explain why the surging Loonie, low inflation and sluggish wage growth all support a near term wait-and-see approach by the BoC.)
Here are the highlights from Governor Poloz’s speech last week:
Governor Poloz closed by saying that “the economic progress that we have seen tells us that the moves we took to ease policy in 2015 were the right thing to do. At a minimum, that additional stimulus is no longer needed, but there is no predetermined path for interest rates from here”. And in case that didn’t make the BoC’s shift-to-neutral position loud and clear, he then said that the Bank “could still be surprised in either direction” and emphasized that it would “feel [its] way cautiously” forward while keeping its inflationary target “front and centre”.
Five-year GoC bond yields fell seven basis points last week, closing at 1.75% on Friday. Five-year fixed-rate mortgages are still available at rates as low as 2.79% for high-ratio buyers, and at rates as low as 2.89% 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 3.24% to 3.34% range.
Five-year variable-rate mortgage discounts remain largely unchanged and are still available at rates as low as prime minus 0.90% (2.30% today) for high-ratio buyers, and at rates as low as prime minus 0.75% (2.45% 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 in the prime minus 0.50% to 0.40% range, which works out to between 2.70% and 2.80% using today’s prime rate of 3.20%.
The Bottom Line: It is now clear that the BoC’s recent rate increases were specifically intended to reverse the two rate cuts that it made in response to the oil-price shock in 2015 and were not intended to be the first rounds of a broader BoC monetary-policy tightening cycle. Going forward, Governor Poloz described the Bank’s approach as “particularly data dependent” and committed to keeping its inflationary targets “front and centre”. With that in mind, I expect that our mortgage rates will stay at or near their current levels at least long enough to allow time for more of the BoC’s “unknowns” to become known.
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