April 19, 2018 – We might have dodged a bullet this week, with the Bank of Canada announcing it will hold its key interest rate steady at 1.25%. This however is not something that will last forever.
Financial institutions each set their own rates as they see fit, depending on a number of factors. The most important one is to look to the Bank of Canada rate, as this drives their cost of obtaining the money to lend out. Then they determine how aggressively they want to attract more borrowers or depositors, how much risk they want to take on, and a few more factors. From there they will set rates for each of their lending products. Depending on your own personal financial situation you will be offered something unique to you.
Mortgage rates are one part of the total debt market. When have been in a period of extremely low interest rates for the past decade. That helped Canadians get through the economic crisis of 2008, helped to stabilize and grow the economy and has contributed hugely to the large growth in property values over the past few years.
But the reality is Canada is heading towards a period of higher rates. The Bank of Canada has suggested rates could rise to somewhere around 2.5%. No we won’t get there in one big jump. This will be done slowly, in 1/4 of a point increments. Mortgage qualification rules were tightened to make sure that people would be able to continue to afford their mortgage as these rates creep higher. If you are applying for a new mortgage you will find that you need to have the income to support the mortgage you want at today’s rates and then you also have to be able to afford it at a higher rate as well. This stress test, although unwelcome, is ensuring people are not caught off guard by rising rates.
Sure, we missed having to swallow another rate increase this week, but we do need to face the reality that rates will be higher in the future.
How High is Too High?
So long as inflation remains in the target range of 2%, there is absolutely no expectation that rates would go back to the 5% to 8% level, or the eye-popping 21% rates seen decades ago. The Bank of Canada has a role in assisting the economy in down times and restraining the economy in boom times. In order to provide some stimulus in the next down-turn, they need to have raised rates sufficiently to have enough room to be able to lower them again and have real financial impact.
I know it sucks, but it is for the greater good of all Canadians.
Light at the End of the Tunnel
Eventually you will get to the point where your mortgage is very small or paid off completely. Then, with your home paid off, you will no longer need a mortgage at all and then you can stop worrying about all this.