After most were forecasting mortgage rates in Canada to start rising in 2015, it looks like consumers “up north” got some welcome news in the form of an interest rate decrease. On Wednesday, the Bank of Canada made the rather shocking move of decreasing its benchmark interest rate to only 0.75 percent from 1 percent, so as to cushion the impact of how decreasing oil prices have been a drag pulling down the Canadian economy.
With this rate decrease in place, economists and strategists are looking forward to lower mortgage rates in the coming months. According to CIBC World Markets chief economist Avery Shenfield, the decision is a sign that “low interest rates will be with us a while longer.” The central bank rate decrease may redound to a drop of about 25 basis points for floating/variable mortgage rates. But since fixed-rate mortgages are tracked against bond yield changes, these products may experience a smaller decline in rates, but a decline nonetheless.
On the other hand, TD Bank announced this week that it won’t change its prime interest rate, leaving the figure at 3 percent. “Not only do we operate in a competitive environment, but our prime rate is influenced by the broader economic environment, and its impact on credit,” said TD Bank in a prepared statement that stressed that there are variables aside from central bank decisions that influence its rates. Likewise, the Royal Bank of Canada did not make any rate changes, saying that it is simply “considering” the Bank of Canada’s decision in relation to a possible rate decrease.
It was originally thought that the central bank would actually increase overnight interest rates later in 2015 amid an improving economy, but with oil prices now at less than $50 USD per barrel, that is believed to have forced the Bank of Canada’s hand. And with overnight rates down, this could mean more consumers taking advantage of lower rates, or at least shopping for them; this was articulated by Royal LePage president Phillip Soper, who said it “doesn’t take long” for consumers to react to such policy changes.
“It will be a lift to the industry overall,” Soper added, in relation to his expectations for the Canadian housing space following the interest rate drop. “However, it will be particularly pronounced in Central Canada, which we believe will see a lift from lower oil prices regardless and, when you add to it the stimulative impact of lower mortgage rates, we should see an uptick in activity.” Currently, five-year mortgages average about 4.79 percent in Canada, according to the central bank’s official statistics.
Interestingly, there is a possibility that the rate drop may influence Canadian consumers to borrow more money, and potentially get themselves into greater debt. But, as CIBC’s Shenfield pointed out, the Bank of Canada sees this possibility as the “lesser of two evils,” so to say. “They’ve shown discomfort with the amount of borrowing Canadians have done, but the economy right now can’t afford to shut the tap off on that if we’re not getting the lift to growth from the energy sector,” he added.