The Bank of Canada (BoC) decided to hold pat on its trend-setting Overnight Lending Rate in its September announcement, officially making it an outlier as other central banks around the world take a dovish approach amid growing China-U.S. trade tensions.
The rate, which is used by Canada’s consumer lenders to set their variable cost of borrowing, remains at 1.75% for the seventh month in a row, indicating variable-rate mortgage holders and those with lines of credit will see no change to their payments in the short term.
There are a few reasons the BoC is choosing to buck the trend and the main reason is that, from a shorter-term prospective, the Canadian economy is actually in decent shape. Both energy production and exports saw growth in the second quarter of the year, while inflation has remained close to its 2% target. The housing market has been an especially bright spot as home buyers appear to have recovered from the federal mortgage stress test as well as other provincial market cooling measures; as a result, activity for condos and houses for sale is surging beyond expectation, in addition to new housing creation.
However, there is reason for caution; the BoC acknowledges that much of this growth will prove temporary with slower conditions on the horizon in the second half of the year. This is partly hinted at by the sharp downturn in business investment between Q1 and Q2. The other is that a rare economic occurrence – an inverted bond yield curve – has been present for several months, which can predict a recession.
This phenomenon occurs when the price of longer-term bonds dips below shorter term, signalling investors believe it is higher risk to invest or a longer-term horizon, when typically the opposite is true.
A silver lining to this, however, is that it has pushed five- and 10-year bond yields to historic lows, which is being reflected in the fixed-rate pricing offered by lenders. This, combined with the rising chance of a variable rate cut before 2019 is through, paints a very advantageous picture for borrowers, as today’s available mortgage rates are available at a discount that wasn’t present in the market even several months ago.
This makes it a great opportunity for borrowers, especially those with strong credit, to work closely with their brokers to secure a competitive deal for their home financing, whether they’re first-time applicants contending with the stress test, renewing, or refinancing their current debt.
It can also be tempting for variable-rate holders to lock in their rates to a fixed alternative, as the spread between the two continues to shrink. However, with 40% of analysts polled by Bloomberg stating they believe an October rate cut will be in the cards, it may be worth waiting for additional discounting in the near future.
Penelope Graham is the Managing Editor at Zoocasa, a full-service brokerage that offers advanced online search tools to empower Canadians with the data and expertise they need to make more successful real estate decisions. View real estate listings, including Toronto and Vancouver houses for sale, as well as sold house prices in Toronto, at zoocasa.com or download our free iOS app.