Some perspective on current interest rates…

When the Bank of Canada raises interest rates, its objective is to curb inflation.

A hike in interest rates slows down inflation by making borrowing more expensive, reducing the amount of money available to spend, and consequently encouraging saving. 

Let’s unpack this: 

• Higher interest rates make borrowing costlier, which can discourage consumers and businesses from taking out loans to spend on goods and services, reducing demand and thus inflationary pressure.
• Higher interest rates increase the cost of credit card debt, making it less likely for consumers to spend money on non-essential purchases, which can reduce demand and inflationary pressure.
• When interest rates increase, it becomes more expensive for businesses to finance inventories, reducing their ability to stockpile goods, which can slow down demand and reduce inflationary pressure.
• When interest rates increase, mortgage rates rise, it can discourage people from buying homes, leading to a slowdown in the housing market… this can affect the affordability of homes, and the demand for housing, leading to changes in the housing market.

Case in point: 

According to the Quebec Professional Association of Real Estate Brokers: “The market saw a total of 3,755 residential sales in April, representing a 26% annual decline and bringing April transaction volumes to their lowest point since 2000. The deceleration was sharpest among small income properties (down by 36%), followed by condos (down by 29%) and single-family homes (down by 21%).” 

How so:  

• Increased monthly mortgage payments: When interest rates rise, the cost of borrowing money increases, which means that borrowers will have to pay more in interest on their mortgages. This will result in higher monthly mortgage payments for homeowners who have variable rate mortgages or who are renewing their mortgage.
• Reduced affordability of homes: As the cost of borrowing increases, it becomes more expensive to purchase a home. This can lead to a decrease in demand for homes, which could result in lower home prices. In turn, this could lead to a slowdown in the housing market. 
• Fewer loan approvals: Higher interest rates compounded by the stress test that adds 2% to the stated interest rate makes it more difficult for some borrowers to qualify for a mortgage loan. Lenders may also require a higher credit score or a larger down payment to mitigate the risk of lending in a higher interest rate environment.

Current rates however, are far from doomsday; the real issue is the Bank of Canada should have never late mortgage rates dip below 2% during COVID – 5-year variable rate dipped to as low as 1.75% – it happened, it is behind us, back to reality, but with a little perspective.    

What were the mortgage rates before the pandemic in Canada?

In January 2020, just prior to the pandemic surfacing in Canada, a five-year fixed rate was trending at approximately 2.89% to 3.09%.

What are they today?

A five-year fixed rate mortgage is trending at approximately 4.59% to 4.89%.

Finally, what was the highest mortgage rate in Canadian history?

In 1981, mortgage rates hit their historical peak at 18.45%. 

Should you play the waiting game? 

Since January, the Bank of Canada rate has been sitting at 4.5 per cent… yes, the highest it's been since 2007, but as shown, not in history. Inflation, meanwhile, is hovering around four per cent — a dramatic drop from its peak of 8.1 per cent last summer so things are heading in the right direction.  

And during a speech at the Toronto Region Board of Trade on Thursday, Tiff Macklem, the Governor of the Bank of Canada, said the Bank of Canada won't back off until inflation drops to around two per cent. And he says he won't rule out hiking the interest rate even higher, if necessary – we believe rates may rise by another 25 basis points on June 7th. “He's asking people to be patient just a little bit longer as high interest rates work to wrangle inflation down and improve the cost of living.”  

No one has a crystal ball, but to think we will again see pandemic rates is dreaming in technicolor. A principal residence, remains a tremendous, tax-free investment, and it gives you a place to live, and raise your family.  

One thing is for sure, renting builds equity for your landlord… full stop!

If you have been sitting on the fence, and you feel it is time to enter the housing market, and you would like to know how much you can borrow, and/or how much you can afford, we can run the numbers, and pre-qualify you for a mortgage. No obligation, and it’s free, simply contact Fred and or Martin, at Fred and Martin Mortgages. 

Fred and Martin