Interest Rates May Rise Sooner Than Expected
Here’s what that means for you as a homebuyer or seller
To offset the economic slowdown caused by COVID-19, the Bank of Canada slashed interest rates to all-time lows. For the first time in history, some lenders were offering variable mortgage rates at under 1%.
“Interest rates will be low for a long time,” the bank’s governor, Tiff Macklem, reassured Canadians last year—at least until 2023. But it now appears that timeline has changed.
According to CBC News, the Bank of Canada predicts the global economy will grow by 7% this year. With government financial aid and businesses turning to less traditional ways to bring in customers amid the lockdowns, economic growth in Canada continued as well. This, coupled with concern that excessive stimulus might drive inflation (which means, among other things, even more expensive housing in Canadian markets) led the Bank to withdraw its commitment to keep interest rates low.
It now looks like prime rates (the benchmark other lenders use to set their own rates) will rise in the second half of 2022.
The Bank can’t raise rates too drastically or suddenly. Such a change would cause a sharp rise in payments for many variable-rate mortgage owners and other debt holders. The sharper the rise, the higher the risk that more would default.
“We remain committed to holding the policy interest rate at the effective lower bound”—i.e. similar rates that are currently in effect—“until the economic slack is absorbed so that the 2% inflation target is sustainably achieved,” it said in a Bank of Canada statement.
What does this mean for the Canadian Housing Market? According to Canadian Real Estate Magazine, it may not cool down for a while.
Any move the Bank of Canada makes will be incremental (about 0.25% at a time), said Dustan Woodhouse, president of Mortgage Architects. “A 0.75% or maybe a 1% increase still means nothing for Canadians with mortgages because 80% of Canadians are in fixed mortgages and the other 20% in variable rate mortgages were stress tested at 4.79%, so an increase from 1.45% to 1.95% or 2.45%, again, is too small to cause anybody to start selling their homes and increase the supply of homes.”
In fact, he suggested the Bank’s announcement could have the opposite of the intended effect: people may rush to buy a new home before new interest rates come into effect, driving more demand.
It’s impossible to time the market, which is why at Spectrum we recommend you buy or sell when the time is right for you. But you don’t have to do it alone. Our experts can help you navigate this competitive market, ensuring you get top dollar for the home you’re selling, and the right price wherever and whenever you buy. Contact us today.
