The key rate is a powerful tool for regulating the Canadian economy, having, among other things, an impact on inflation as well as all interest rates. (Photo: 123RF)
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GUEST BLOG. Lately, we’ve been hearing more and more about future interest rate hikes, including mortgage rates, especially since the Bank of Canada announced on October 27 that it was planning to move ahead in the 2nd or 3rd quarter of 2022. of its key rate, which has stood at 0.25% since March 2020.
At that time, the rate was lowered to stimulate the economy, including real estate, in the short term, during the pandemic. However, to limit the over-indebtedness and excessive growth in house prices, it may need to be increased.
The key rate is a powerful tool for regulating the Canadian economy, having, among other things, an impact on inflation as well as all interest rates. It is therefore normal that economists are racking their brains to decode Governor Tiff Macklem’s messages. In terms of mortgages, the key rate has a more direct and immediate influence on variable rates than on fixed rates.
A simple exercise for guessing possible short-term movements in fixed rates is to watch Canada bond yields. To determine their mortgage rate for a 5-year term, banks add their fees and profit margins to the yield on Canada bonds.
This relationship is relatively direct, but not necessarily immediate. For example, yields have increased since the end of September and the rise in mortgage rates only partially reflects this change. There may be other increases. No one can predict with certainty how these returns will change in the future. These bonds are traded and are subject to several other factors.
Typical 5-year Canadian government bond yields (Photo: Bank of Canada)
In recent months, the Bank of Canada had started to reduce its purchases of Canada bonds and this helped push up bond yields. Just because yields have increased recently does not mean that we can conclude that they will continue to rise in the coming months. For now, bond yields are still at a very low level. Indeed, it is possible to obtain a mortgage at 2.2% for a fixed term of 5 years.
Lower inflation to 2% by the end of 2022?
A drop to 2% is what the Bank of Canada is aiming for. With current inflation of 4.4% (5.1% in Quebec), it is legitimate to wonder if this is realistic.
On this subject, all economists seem to agree on two international factors having a temporary impact, namely the disruption of supply chains as well as the cost of oil which, in 2020, let us remember, was relatively low. It therefore comes down to pre-pandemic prices. The annual increase is therefore considered high in 2021, which should not be the case in 2022.
Europe and the United States also seem confident to see inflation drop to around 2% in 2022. Consequently, the directors of the various central banks have not announced any hikes in their key rates for 2022.
However, it seems legitimate to me to be concerned about scenarios where inflation would take longer to reach 2%. Particularly in this time of labor shortage, where companies are raising wages to attract and retain employees. They may also increase their prices.
“The Bank of Canada’s main support, the purchase of government bonds, continues to this day and totals more than $ 330 billion since the start of the pandemic. By mass repurchasing the bonds issued by the Canadian government, the Bank of Canada is simply creating money and financing the record federal deficit. This intervention helps to support interest rates even on longer-term government bonds, ”wrote Ian Gascon in October in Les affaires plus.
However, the Bank of Canada has just announced that it will stop increasing this amount and will only buy back bonds to replace those that come to term. Even though the $ 330 billion will stop growing, quantitative easing creates inflationary pressures.
How to react?
There is no silver bullet, but knowing the impact of rate hikes and possible measures can help reduce your level of worry. Desjardins plans two key rate hikes of 0.25% in 2022 and a few more in 2023.
In most cases, the cancellation fees are too high to break your fixed rate mortgage before the end of the term. You must therefore wait until the end of your term before making a decision. To reduce your mortgage payment, request the longest amortization period allowed. Converting a variable mortgage to a fixed mortgage is not necessarily a good decision.
Upon purchase, the amount of the mortgage loan granted is calculated at a rate of 5.25%. The government, with good reason, requires that you be able to absorb a future rate hike. Forget the past. You won’t have the mortgage rate at its all-time low, but it will still be very low. Therefore, ask your bank for a mortgage pre-approval to freeze your rate.
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