Bank of Canada

On December 8th, The Prime rate in Canada held steady at 2.45%. For the first time ever, the Bank of Canada, has explicitly provided a year (2023) for its next potential rate hike. This is a “projection” the Bank says, and still subject to change. Governor of the Bank of Canada, Tiff Macklem said “It means that if you’re a household considering making a major purchase, you can be confident that interest rates will be low for a long time. The economic outlook would need to drastically change to warrant negative rates.” So if the BoC does cut rates again, that cut may not be a full quarter point but could be less. A second wave of COVID remains the biggest risk, yet the Bank of Canada sees 4% GDP growth for the next two years. Canada hasn’t seen that growth rate since 2007. Over the next “number of weeks,” the BoC will reduce its bond buying from $5 billion to $4 billion. But, and this is a big “but,” more of its purchases will be 5-year bonds. That’s good news if you’re hoping for lower 5-year fixed rates. There is a very close correlation between the bond market and five-year fixed rates.

All indicators show that variable rates will remain steady based on the hold steady approach the BoC is taking with the Prime rate. A decrease is slim chance but a chance non the less. Fixed rates are expected to hold steady well into 2021 and further depending on the continuation of bond buying by the BoC.
Interesting fact: “More than 1/4 of respondents to the Canadian Survey of Consumer Expectations in the third quarter of 2020 reported they would like to move to a larger or single-family home because of the pandemic.”—Monetary Policy Report. Many reports show that first time home buyers entering the market and keen to own their own homes after feeling confined in small condos or rental properties during the lockdown. Many move up buyers are ready to have more space, may now be working at home and require office space, or need a home gym.

Just a reminder – if you are purchasing rental properties or who may need to sell in the next five years (job loss, health issues, or relationship changes) these homebuyers should strongly consider variable interest rates. Variable will hold steady or decline up to the end of 2023. And the breakage penalties on variable rate is always three months interest cost vs an interest rate differential on fixed rates. Beware as realtor – if your buyers may want or need to sell they need to be set up in a mortgage that allows a sale. We are seeing that fixed rate breakage penalties (especially at Canada’s big five banks) are currently incredibly high and are a detriment to being able to list and sell properties. The banks only advertise fixed rates and often only offer fixed rates unless a client specifically asks about variable rates. This is not in the best interest of Canadian mortgage holders. Both rate options are an important part of the mortgage conversation.

If you are considering refinancing, have a mortgage that is coming to renewal or are thinking about buying reach out. We are here to help walk you through the rate debate!