BoC To Front-Run Fed

Bank-of-Canada-Rates The Bank of Canada often takes its cues from the U.S. Federal Reserve when setting Canadian interest rate policy.

This time, “The Bank of Canada is basically going to fly solo,” says CIBC economist, Benjamin Tal. That’s because Canada is in a clearly stronger economic position than our southern neighbour.

Investment manager, MFC Global, agrees. It estimates that the Bank of Canada will keep its key lending rate 25-75 basis points above the fed funds rate starting this summer.

So, with economists calling for an imminent rate hike, people naturally want to know how fast rates could move.  We’ve noticed a big uptick lately in questions like: “How quickly does prime go up?”

In reality, that’s kind of like asking: “How long will it take Alex Rodriguez to hit 20 home runs this year?” You know what A-Rod has done in the past, but you’re never sure what he’ll do this year.

Just for kicks, we looked back at the last four rate cycles for clues. Doing so illustrates that it’s taken an average of 7.75 months for prime rate to rise the first 1% in a rate increase cycle. It’s taken 12 months, on average, for prime to jump 2%.

These numbers are not statistically sound because there aren’t enough samples.  Nonetheless, it’s clear that the Big banks’ forecast of a 2.75% hike in 19 months seems achievable. (Not our prediction, just an observation!)

Prime-Rate-Chart ____________________________________________________

Sidebar:  Here’s commentary from Peter Aceto, the chief executive of ING Direct Canada, on why fixed mortgage rates have jumped so fast lately:

“It’s pretty likely in this environment that your funding costs [as a lender] are going to be higher in 90 days or 120 days.”

Aceto says RBC “may have been thinking about that risk” when they chose to lead the market and raise fixed rates 85 bps.

  1. Decisions, Decisions, Decision. Variable or Fixed?
    50% of me feels the banks are right and the other 50% feels they are trying to scare us into fixed for profit reasons.
    Fixed is tempting if 5% prime in less then 2 years is a good forecast.

  2. Personally I think the decision to go fixed might have been easier a month ago. Now that fixed rates have gone up – twice – in the last few weeks, fixed rates are losing a little bit of their lustre.
    Yeah, variable rates are definitely going up, and fixed rates are still low by historical standards, but the arguments to go fixed now aren’t quite as compelling as they were 3 weeks ago.
    BTW, going fixed doesn’t automatically mean choosing a 5-year rate. One can choose shorter terms, to take advantage of lower fixed rates.

  3. Good points but keep in mind that after April 19th purchasers will have to qualify on the higher benchmark rate if they want to go with a Variable or a term shorter than 5 years.
    I don’t think its any coincidence that we’re seeing fixed rates rising due to the fact that some (most?) buyers will have to qualify with the 5 year contract fixed rate.
    It is just simple supply and demand at work.

  4. As of today, my variable is already with BMO and they are still offering 3.95 as opposed to the 3.75 a few weeks ago.

  5. If you are sitting on a Prime minus Variable from a while back I wouldn’t lock in. I would honestly talk to a mortgage planner and have them work some scenarios for you.
    One option if it is available to you would be to increase your monthly payment to match the fixed 3.95% rate but enjoy the lower rate Variable while really taking a bite out of your principal.
    That is only one option that may or may not suite your personal situation.
    Again I stress you should contact a mortgage planner as it sounds like you are not getting the full answers you need from your branch contact.

  6. What do you think about this situation: I have 4 years left on a mortgage with 3.69%. I just sold this property, and purchased a new one. I can port this mortgage, but have also been approved for a variable at 1.8%, or a 1-year at 2.2% and for a 3.89% with enough cash back to cover the penalty. One advantage of not porting the mortgage is lower downpayment requirements on all of the new approvals.
    I am very interested in hearing your opinions. Thanks!

  7. Hi Eug, You’re bang on about fixed mortgages making more sense last month. For people without fixed rate guarantees, the math has changed. We’ll run a piece tonight on this very topic. Of course, there’s a lot more to the fixed/variable decision than mathematical projections, but the numbers are compelling nonetheless. Cheers for now…

  8. Just wanted to say thank you for all of the great information on the site. I was a little nervous about what’s to come in terms of rates and the like but after loyally following your feed I’m comfortable sticking with my variable rate:
    I’m currently sitting with a rate of prime -.9 and in order to get a feeling for what the payments may become I’m going to bump up my semi-monthly payments by 15% immediately.
    One question though. My term is up in two years given and I have an excellent track record with my current financing company (no late payments/missed payments and the like) what can I expect when it comes time to renew … could I expect to renew for another 5 years at with the same terms. My gut tells me this is unlikely.

  9. It’s tough to say without getting a complete financial picture, goals with the property etc.
    Depending on your penalty though it may be best to stay with the 3.69%. It’s a great rate!
    If you are a little more aggressive you could potentially come out ahead by going VRM at 1.75% if you based your payments at the 3.89% rate. That though would depend if you can in fact qualify for a Variable with the new guidelines.
    I would encourage you to setup an appointment with your mortgage broker to go over the options as I’m guessing you have some time before your transaction closes.

  10. Thanks Scott. When we renewed and went from 5.43 fixed to a Prime-4 variable, we actually increased our already increased payments at that time.
    If I have my math right, our payments equal to something around a 10% rate so I’m confident we can afford a rate increase. I just want to pay as little interest as possible on the remaining $140k.

  11. I also credit the information (and people) on this site for my great mortgage choices over the past year. Last July I renewed into a 1 year fixed as recommended by Rob since there were few prime – discounts and the 5-year wasn’t outstanding. Renewed early 3 weeks ago for a 5-year 3.75%. My second mortgage is a variable at prime – 0.6% with 3 years left. I think I have the best of both worlds here!

  12. Many thanks to this website. I’ve have 2 mortgages on variable at prime-0.85. Understanding recent economic news, I decided to lock in a third mortgage at a 3 year fixed rate at 3.45%. The variable mortgages still have a 3 year life. I found having all 3 renew at the same time gives me more leverage with the vendor without having to resort necessarily to a blended product.

  13. I think Rob is fantastic for keeping both mortgage brokers and the general public for keeping up to date on the “what to do’s”. I myself would still recommend a variable. Even factoring in rate increases over the next 5 years up to 6.00% you would like save about 25% in interest.
    That is my 2 cents…

  14. Interest rates, in particular those offered by governments, will ultimately go to 0%. The trend on the long term supports this, even if there is a short term spike in rates. The title of this article really should be ‘BOC will attempt to front run Fed’. Canada has its strenghs and I am glad to live here, but Governments throughout the world have grown too large, we all know this, and the only way these governments can support themselves is to monetize debt. And that is extremely destructive to wealth – if they were to stop the entire system would shut down..and the only way they can keep it going is to pay less interest. The act of monetization used to be a way of creating wealth and advance our society, now it is used to spend and consume. This will ultimately the downfall of our economy. Hopefully we will be able to fix this.

  15. Hi Diva,
    First off, thank you for the kind note. Secondly, we’re running a story tonight that speaks to this very point (i.e., about variables in today’s market.)!

  16. Rob
    1.why is it that lenders are saying something and when they get complete deal quoting differently
    2. where do i get the discounted or borkers rate on one site…like has albeit for mortgage agents…instead of sifting into individual mailers from lenders, some who are so busy wouldnt take a new broker???

  17. The Bank of Canada cares about one thing: inflation. That is where the conversation should focus.
    If inflation is high rates will go up, and vice versa. It is very simple. Unfortunately we cannot forsee inflation.
    If inflation were high, the BOC would not be able to artificially keep rates low. It doesn’t matter how much debt we have as a country.
    My opinion.

  18. Hi Richard,
    Thanks for the thank you.
    To answer your question: It is no better than a 50/50 shot that we’ll see prime – .90% in two years. Spreads just aren’t what they used to be and a lot can happen to variable-rate pricing (both positive and negative) in that time!
    Take care,

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