Wait, what? How is it September already!? Summer flew by for the RateHub.ca team, as we were busy planning a move (our HQ is downtown now!), looking at Toronto real estate (some of us are new homeowners!) and working on some big changes to the site. While we’re a little sad that those few months of warm weather have already passed us by, fall is going to be full of big announcements – and we can’t wait to share what they all are!
Oh, but enough about us – you probably want some mortgage news:
Bank of Canada Interest Rate Announcement
This morning, Bank of Canada Governor Stephen Poloz announced that the overnight lending rate would remain at 1.00% – a position it has now held for 4 years straight, since September 2010. The low interest rate has not only created a favourable borrowing environment for Canadians, it has helped variable rate mortgage holders, whose interest rates are attached to Prime (which follows the overnight lending rate), pay down their mortgages at record-low interest rates.
How long will the rate sit at 1.00%? While the media typically reports on how core inflation relates to this prediction, last month, Poloz discussed how our persistent slow growth in job creation and the employment rate will affect interest rates. In short, it won’t. In an interview on August 22nd, Poloz said that even if employment picks up – something which has restrained income growth in our economy – the central bank plans to keep interest rates low.
“The trend of employment growth has been around 1.00% for some time,” said Poloz. “We’re confident there’s quite a bit of room to grow and, particularly since our interest rates are already at 1.00%, we figure we’ve got time to watch this unfold.”
Economists surveyed by Bloomberg estimate the interest rate will remain at 1.00% until Q3 2015. The next interest rate announcement is scheduled for October 22, 2014.
Fixed vs. Variable: What’s the Latest?
Prime rate may not be moving, but I have noticed, interestingly, that variable mortgage rates have steadily been creeping downwards the past two years. Right now, you can get a 5-year variable mortgage rate at 2.19% in Ontario. Sounds like a great deal, right? So great that I felt it necessary to check in on the longstanding fixed vs. variable debate.
If we expand the time horizon and look at the spread between the best 5-year fixed and variable rates over the past five years, variable rates are not quite, comparatively, the great deal they seemed. Don’t get me wrong, variable rates are incredibly low, but 1) not as low as they have ever been (2.05%) while the Prime rate has remained at 3% and 2) not so low compared to the spread between fixed and variable in 2010 and 2011.
One could argue you should lock in now to a fixed rate while the spread is low and variable rates will inevitably increase. On the flip side, economists have been predicting the Bank of Canada will raise the overnight lending rate for years, and it still hasn’t happened. With rates this low, there’s not really a bad decision either way, so long as you don’t take on too much debt than you can afford to carry if mortgage rates are higher when you renew your mortgage.
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‘Til next month!