Bank of Canada Rate Announcement – The Good and Bad

Bank of Canada Increases the Overnight Rate to 1.75%

As expected, on the October 24th Bank of Canada interest rate announcement, the central bank increased its’ overnight rates by 25 basis points to 1.75%. Lenders quickly followed by increasing the prime rate by 25 basis points to 3.95% for most lenders. This is the 5th increase since tightening phase began in July 2017.

For the first time since tightening began, the Central bank has provided some guidance on where rates are headed. In its’ statement, the central bank said it would return the overnight rate to a neutral stance.

The neutral rate in Canada is estimated to be between 2.5% and 3.5%, which implies that at a minimum, we will see three more 25 basis point increases and as much as seven 25 basis point increases.

In previous statements, the Bank of Canada has used the term “Gradual” when referring to further increases in the overnight rate. This time, they omitted the term “Gradual” implying or leading some of us to believe, they plan to move quickly to increase the overnight rate towards a neutral stance.

The next Scheduled policy interest rate announcement is December 5th, 2018. You should expect another 25 basis point increase at that meeting or at the latest, the January 9th 2019 meeting.

Look for guidance after the next rate announcement for a sense of how quickly the central bank will move toward the neutral stance. This will likely be guided by how well households adjust to higher interest rates, given elevated debt levels.

The scheduled dates for the interest rate announcements for 2019 are as follows:

9

January 9

9

March 6

9

April 24

9

May 29

9

July 10

9

September 4

9

October 30

9

December 4

The Good News

The good news here is that we have guidance. We know the Bank of Canada’s target for the overnight rate. With at least three more 25 basis point increases coming,

Mortgage Lenders are currently very aggressive on the variable rates’ discount to the prime rate. We are seeing discounts of prime less 1.15% or better. With prime now at 3.95%, applying a discount of 1.15% would put you at a starting point of 2.80%. The result of adding 75 basis points would increase the rate to 3.55%, right in line with current 5 year fixed rates.

If you are getting a new mortgage loan, then the variable might still be a good option. But consider whether or not floating payments will cause you stress.

Our lending partners have indicated, that as the Bank of Canada increases the overnight rate , lenders will be less likely to pass on the entire rate increase to clients. This suggests our lending partners’ prime rate will not necessarily mirror the increase in the central banks overnight rate. The closer we get to the neutral stance, the less likely it will be that lenders will pass on the full increase to customers.

The Bad News

Current variable rate mortgage holders, as a result, will be paying approximately $20 more per month for every $100,000 in mortgage borrowed.

With current fixed rate mortgages in the 3.40% to 3.60% range and you have a variable rate of 2.85% or higher, you may want to consider locking in your rate.

Are you looking to purchase a property, refinance or consolidate debt? If you like, I can tell you exactly how much you can afford to borrow, which is the best mortgage for you or how much you could save you right now if you have an existing mortgage or have high interest debt.

Dominion Lending Centres Edge Financial
8 Sampson Mews, Suite 201 | Toronto | ON | M3C 0H5, FSCO #10710

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