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Canadian Mortgage Rates

March 9th, 2011    •  Written by    •   No Comments »

Categories: Bank of Canada, Canadian Mortgage Rates, Fixed Rates, Variable Rates

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I’ve been asked quite a bit lately where I believe Canadian mortgage rates are headed. Nobody can know for sure but a Calgary mortgage broker can make fairly accurate forecasts based on not only their industry experience, but also some of their background and education in economics such as mine.

It’s important to note that fixed and variable Canadian mortgage rates don’t move in unison. The factors that affect fixed Canadian mortgage rates and variable Canadian mortgage rates are quite different.

Fixed Canadian mortgage rates are driven by changes in the Government of Canada bond yield. In simple terms, when people move their money out of bonds, it drives their yields up. Since investors are looking for a higher yield (which equates to a higher return on their investments), banks need to increase fixed Canadian mortgage rates so that their yields are competitive with those of the bonds. Therefore, increases and decreases in the bond yield typically signify an upcoming change in the fixed Canadian mortgage rates if those increases/decreases are significant enough.

Variable Canadian mortgage rates are driven by changes in the Bank of Canada’s key interest rate. Where the factors that affect fixed rates are driven entirely by the market, The Bank of Canada has some control over the changes in variable Canadian mortgage rates. They don’t, however, have complete control as it is often necessary for them to change this interest rate to maintain stability in the Canadian economic system. For instance, if inflation surges above the Bank of Canada’s comfort zone, the Bank of Canada will be forced to increase interest rates to reduce inflationary pressures. The opposite also holds true where they can lower the rate if inflation is below the range of comfort. Another scenario that would cause the Bank of Canada to increase or decrease rates is economic growth. If the economy is growing too quickly, the Bank of Canada might increase interest rates to cool it down. This would reduce the chance of a bubble developing. During a period of economic contraction, lowering the interest rate is often a strategy employed to stimulate the economy.

As such, it’s important for a Calgary mortgage broker to be able to use their economic knowledge to forecast not only the state of the markets and whether or not money is moving into Government of Canada bonds, but also the state of the economy and inflation.

Currently, we’ve seen some upward inflationary pressure and strong economic growth. Some would say that this has all the ingredients for a variable Canadian mortgage rate increase in the near future. What I’m currently looking at is the implication of a rate increase to the economy. For instance, if the Bank of Canada increases rates, how many Canadians with variable mortgages will be stretched thin as a result of their higher monthly Canadian mortgage payments? Since some variable Canadian mortgage rate borrowers didn’t have to qualify on the 5-year fixed rated up until April of last year, there could be quite a number of borrowers who struggle to make their payments as a result of an increase in interest rates by the Bank of Canada. I wouldn’t be surprised if this is what the Bank of Canada is currently struggling to determine before they raise the rates, as doing so might have an adverse effect on the economy.

As for fixed Canadian mortgage rates, as long as the economy performs well, I anticipate the rates will go up. I am, however, wary that any slide in the market could cause a shift on investments from stocks to bonds, which would decrease the fixed Canadian mortgage rates. Since fixed Canadian mortgage rates are at historical low levels, it’s hard to picture rates too much lower so if you’re looking to buy and looking at a fixed Canadian mortgage, this is a great time to buy. Please note though that you should be buying for the right reasons. The most important question you should be asking yourself before buying is could you live with a 20% decrease in the value of your home over the duration of the mortgage term? While this seems extreme, it’s a question that should be asked nonetheless. I’ve heard the old adage ‘But it’s different here’ thrown around too many times. There’s nothing wrong with being a little cautious, especially when we’re dealing with what is possibly the largest financial purchase of your life.


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