Although Canada has not been affected by the global financial crisis as much as their southern neighbours, the Canadian Government has lowered interest rates in an effort to stimulate the economy. This has resulted in record low mortgage rates and helped drive the recent surge in home purchases. The question remains, how long will these low mortgage rates stick around?
As expected by most economists, the Bank of Canada announced on Tuesday that it will leave its key interest rates unchanged and that the rates will remain at its all-time low. The Bank also reiterated its commitment to hold its key rate at the current level until the end of the second quarter of 2010, conditional on the outlook for inflation. In its statement the Bank noted that “While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly.”
Lenders are expected to keep their prime lending rate steady. Variable-rate mortgages, variable-rate credit cards, and home equity lines of credit are typically linked to a lender’s prime rate.
Several Canadian economists feel we will probably see the Bank of Canada keep rates where they are until the end of 2010. The BOC will be reluctant to raise rates ahead of the US due to the resulting increase in the Canadian dollar. A further increase in the Canadian currency in relation to the US dollar would most certainly have a negative impact on Canada's fragile economic recovery. The question is not will rates go up, but when and by how much.
Canadian current interest rate environment which has seen falling interest rates for the past year has been driven primarily by Government's economic stimulus policy. When Government feels the economy is experiencing a sustainable recovery they will raise the prime lending rate in an effort to keep inflation in check. As well, a strong economy will push Canadian Government bond yields higher forcing an increase in fixed mortgage rates in Canada.
On the fixed rate side, positive jobs data in the US and Canada last Friday caused an increase in Canadian 5 year bond yields. An increase in bond yields is usually a precursor to an increase in fixed mortgage rates. As of now none of the banks have made a move to increase their fixed rates, but we have probably seen an end to the falling rates that have been occurring over the last two Weeks. Still, even if rates hovered around their current 3.99% we are still looking at some of the lowest fixed rates in history, and far better than the 10 year average of about 5.40%.
Written by Brad Compton
Mortgage Consultant, Invis Inc
phn: 416-671-2183
bradcompton@invis.ca
www.YourLowMortgage.ca
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