Big 6 See Rate Hike in May or July

Businessman Consulting Glowing Crystal BallWith the Bank of Canada maintaining the status quo yesterday, many are wondering what’s next for mortgage rates.

If you put any stock in the Big Six banks’ predictions, here’s the latest commentary from their professional ball gazers…

CIBC: “We’re sticking with our view that an upgraded economic outlook in April’s policy report will pave the way for a rate hike in May, assuming the C$ settles down a bit before then.”

BMO: “We judge that the bank is waiting for evidence that U.S. economic performance is strong and steady enough to ensure that Canadian exports will contribute to Canadian economic growth regardless of the level of the loonie. We’ve pencilled in a July resumption of rate hikes.”

National Bank: “There is a compelling case to be made for higher interest rates in Canada since excess supply is closing faster than previously anticipated by the Bank…We remain of the opinion that the next rate hike will occur at the May 31 interest-rate setting meeting.”

RBC: “The Bank is unlikely to stay on the sidelines for long if the data continue to show that the economy is maintaining its upward momentum…We maintain our call for 100 basis points of rate increase in 2011 with the first hike coming in May 2011.”

Scotiabank: “…When it comes to forecasting the resumption of rate hikes by the BoC … we think that doesn’t occur until October of this year.”

TD: “In the wake of today’s statement, markets will pare back bets that a rate hike is in the pipeline in April or May…A next hike in July still appears the fairest bet.”

Rate-HikesThese predictions apply to the overnight rate, which has a direct impact on prime rate. Prime rate, of course, is the basis for variable mortgage rates.

As always, it’s worth remembering that economist rate predictions are subject to change and error. That said, for fun we ran some quick numbers based on the banks’ estimates.

For argument’s sake, let’s suppose that:

  • You want to compare a 5-year variable versus a 5-year fixed rate
  • You’re willing to set the variable-rate mortgage payment so that it’s as big as the fixed-rate payment (Normally, variable-rate payments are less than fixed-rate payments.)
  • Prime rate starts rising again at the July 17 BoC meeting and rises ¼ point each BoC meeting until the overnight rate climbs 2.25 percentage points
  • This puts the overnight rate at 3.25% by year-end 2012 (Note: 3.25% happens to be a rough estimate for the “neutral” BoC policy rate…if not a tad low. A neutral policy rate is a BoC overnight rate that neither stimulates nor restrains economic growth.)
  • Rates remain flat for years 3-5 (Rates may fluctuate further but we’ll assume they average out to no change over that three year span.)
  • You have a $250,000 mortgage amortized over 30 years.

Deciding-between-fixed-and-variable-ratesIf these things hold true, which would perform better?

a) Today’s typical 3.94% 5-year fixed mortgage; or,

b) Today’s typical prime – 0.80% variable-rate mortgage?

Based on the numbers alone, the fixed rate has a $416 interest cost advantage over five years.

Does that mean you should go fixed instead of variable? Not necessarily.

There are several instances where someone might prefer to pay less interest up front, or have a three month interest penalty instead of an IRD penalty. In those and other cases, a variable may be the better fit.

The point here is just that 5-year fixed and variable mortgages are now neck and neck based on the big banks’ future rate assumptions (for what those are worth). Would it pay to roll the dice on a variable rate to save a bit of interest? You and your mortgage advisor should make that call.


As a side note, if you’re well-qualified and shopping for a mortgage, talk to a mortgage professional about shorter terms as well. As we speak, there is decent value in 2- and 3-year fixed terms.

Sources for quotes: Globe & Mail, Globe & Mail II


Rob McLister, CMT

  1. Hi,
    I am not a professional banker or broker but i enjoy reading your expertise and trying to pick up some pointers along the way.
    One simple question i have though is why is so much attention directed at rate hikes? Aren’t the banks making enough money with the current rates? Why can we not have a stable economy with stable interest rates and stable gas prices? Would that not be best for all?
    I owe the bank close to $500,000 and they are making close to $1600/month in interest off my debt. When is it enough? I get so sick an tired of hearing about interest rate hikes. They should be left along at a fair market value and enough said!!!
    have a nice day

  2. Comments in this thread may be the strongest case I’ve ever seen for BOC to begin raising rates immediately.

  3. I would like to see rates go way up, my savings are nearly all cash and GIC’s, maybe not the smartest place to keep my money, but it is the safest.
    Bill my monthly interest earnings used to pay all of my rent, food and utility costs, so I would like to see 10% BOC rates.

  4. Well Bill, I get that you’re frustrated about your $1600 in interest monthly, but if the bank didn’t lend you the money you wouldn’t be living in your house. You could try saving the money and pay cash for your home. Or maybe you should just rent – no interest cost there, just shelter with no opportunity for equity gain either. Nobody owes you free money.

  5. Great site, glad I stumbled across it while researching some (regrettable) Garth Turner predictions about the real estate market.
    One myth I would like to debunk is the looming baby-boomer-mcmansion-property-dump theory that doomers consider a pillar of their “real estate is going to crash” mantra.
    The baby-boom generation constitutes a demographic of those born between 1947 and 1966, a twenty-year span; the leading edge of which is quickly approaching 65 years of age.
    Conventional doomer logic would have you believe that the entire 20-year cohort are about to dump all of their “huge” homes on the market simultaneously, thus flooding the market and depressing prices.
    I say bunk. First of all, the boomers will not all be retiring in the same year. Common sense would dictate that retirement will follow the same pattern as the birth rate, such that roughly 1/20 of the baby-boom generation will retire each year, reducing the potential number of potential “mcmansions” coming on the market each year dramatically.
    Second. Not all boomers owm homes, thus will not have one sell.
    Third. Not all boomers own mcmansions. In fact fewer than 10% of all single-family homes are in excess of 3,000 sq. ft.
    Fourth. Not all boomers will move. Many like their home and their neighbourhood and will only be leaving them feet first.
    Fifth and finally. Immigration levels in Canada will more than make up for the retirement rate, such that any influx of boomer homes on the market will be easily absorbed by the marketplace.
    (Just had to get that off my chest) Cheers!

  6. I don’t necessarily disagree with the overall premise of your post (that boomers will not downsize en masse), but your fifth point isn’t quite accurate. I’m only seizing on it because I work in the field.
    Immigration brings in approximately 250,000 new permanent residents each year, not all of which end up staying. HRSDC’s most recent publicly available COPS projections estimate retirements at approximately 400K per year by 2017.
    So immigration will mitigate the housing effect of retiring/expiring workers, but not wholly offset it.

  7. George, I bet you would like to see 10% GIC rates but what if inflation was 15%, would you still take 10%?
    Back in the day when GIC`s were paying all of your rent, food and utility costs, net of inflation, those governments of the day were racking up ridiculous accumulated deficits and paying inflated borrowing rates. Those “good times” that you crave are over and all the debt left in your generations wake is a legacy left to today and future generations to sort out.
    That is why GIC rates will not be 10% anytime soon. Today’s working generation is too busy paying full price for their education, housing, future retirement, taxes as well as crushing debt payments of past.

  8. Thanks for your response, but again I must reiterate my post is in relation to the effect of retirees on the re-sale housing market.
    It must be remebered that not all of the 400,000 retirees are homeowners, not all of them own “mcmansions” and not all want to move out of their home. So the number of over-sized mcmansions spilling on to the market and depressing prices due to retirement has been greatly over-estimated by some.
    Let’s not forget that clearly
    many boomers who sell will be selling to domestic buyers as well as immigrants.
    Essentially it is my contention that real property demand will easily be able to absorb the supply of larger homes coming on to the market in the future, mainly because there simply won’t be as many as some believe.

  9. Its a circle Karen, you say if they didn’t loan him the money he would be unable to be living in his current home; But if WE did not deposit our money the bank would have none to give. It does not make much sense that a bank pays one nearly nothing for a rate of return when they have your money, yet robs you when you borrow from them. There should be a limit to or a certain margin between the two. I mean if the bank has a mortgage rate of 6%, your return on any monies within that bank should be at least 4%.

  10. There is a limit – it’s called the market. You’re free to give them your deposits – or not. You’re free to borrow from them – or not.

  11. Appraiser, what is missing here is data about retirement savings among baby boomers.
    Those who have healthy retirement savings outside of RE will be able to stay in their homes for as long as they are physically able. Those who do not may have to rely on HELOCs or downsizing to pay the bills.
    Absent hard data about retirement savings, it’s hard to make any firm predictions, but surveys don’t paint a pretty picture:
    “TORONTO (October 28, 2010) – For their next move, Ontario boomers are looking to
    downsize to smaller homes. According to the TD Canada Trust Boomer Buyers Report,
    86% of Ontario boomers say their next move will be to a smaller home. Half say a
    smaller home will help them save money and 36% will move to enjoy more luxurious
    features.”
    (http://smr.donovangroup.ca/TDBank/TD_Boomer_Buyers_Report_Ontario_Regional_Release.pdf)

  12. “Conventional doomer logic would have you believe that the entire 20-year cohort are about to dump all of their “huge” homes on the market simultaneously, thus flooding the market and depressing prices.”
    I would be interested in knowing where this argument comes from — I’ve never seen anyone claim that the entire 20-year cohort will retire en masse, not even Turner. Turner’s views are similar to my own, in that the issue is not the number of retiring boomers per se but their need to down-size to raise funds for retirement.
    “Second. Not all boomers owm homes, thus will not have one sell.”
    No, but home-ownership among boomers is very high — among the 55-to-64 set it is just under 80%, higher than any other age group. (See http://www.statcan.gc.ca/pub/11f0019m/2010325/ct003-eng.htm) This is certainly a higher ownership rate than even immigrants who have been here a few years.
    “Third. Not all boomers own mcmansions. In fact fewer than 10% of all single-family homes are in excess of 3,000 sq. ft.”
    The relevant data would be the average size of homes owned by boomers.
    “Fourth. Not all boomers will move. Many like their home and their neighbourhood and will only be leaving them feet first.
    As in my other comment, I think the determining factor will be the availability of other, more liquid retirement savings. Boomers who have other savings can stay put, those who only have their homes need to pay the bills somehow.
    “Fifth and finally. Immigration levels in Canada will more than make up for the retirement rate, such that any influx of boomer homes on the market will be easily absorbed by the marketplace.”
    I agree with Al R’s response to this point (about immigration numbers vs. retirement numbers) and would also repeat my earlier comments that immigrants in general are primarily young and have low incomes. While they aspire to home ownership, it takes a long time in Canada before they reach home-ownership levels seen in Canadian-born people of comparable age. (It’s easy to be blinded by some of the “hot money” immigration scenarios seen in Van and TO — these are a minority of the 250k who come here.)

  13. Hey Bill,
    You may be surprised to know that you do not want market rates determining your interest rate. If it wasn’t for various forms of meddling by central banks and governments you’d be paying a lot more to borrow. Currently interest rates are close to record lows.
    PS. Higher rates would produce a more stable economy, since low rates cause volatile speculation.

  14. Hello appraiser,
    What you have to realise with the boomers is not that they will all do the same thing at the same time, it’s that they will cause a statistically significant shift. If 10,000 boomers sells their houses (whatever size) and there are only 9,000 younger folks to buy them, then you’ll see notable changes in the housing market.
    It could well be that Garth’s stereotype of the broke boomer desperately trying to offload their oversized house will be the ones selling their houses and establishing the comparables.

  15. I’m honestly curious about how demographics will impact the housing market. On the one hand, as has been mentioned here, there is a surge of boomers that will eventually retire and pass on, which should, logically, produce a lot of supply to offset demand over the next few decades.
    It’s probably reasonable to assume that not many people downsize unless there’s a compelling financial reason to do so. Few people want less space after they’ve lived in something big(ger) for 30+ years.
    Pension plan coverage is not stellar, but it is also true that the biggest success story in Canadian social policy over the past 25 years has been the virtual elimination of poverty in old age. Between CPP and OAS, there aren’t very many who can’t afford a modest standard of living. In addition, reverse mortgages allow seniors to access equity without selling. Seniors should be ok.
    Total population is not expected to drop in Canada while the boomers are still around and kicking (thanks in large part to immigration), so unless other factors change (e.g. rate of home ownership), I’m not sure supply will outstrip demand growth, although it may not be great for new home builders.
    I admittedly have only thought about this superficially. I would love to hear reasonable alternate views.

  16. Al R,
    There does seem to be a lack of data to confirm what will happen with the boomers. Of course boomers will be a net supplier of housing, but how much and at what rate? How motivated will they be to sell? Will builders slow down anticipating too much competition? Will the younger generation have the funds to pay what the older generation wants to sell for? Retiring boomers certainly have the potential to have a significant impact on the market, but there’s a lack of good data to make solid predictions.
    I do want to question your opinion on boomers’ choices on downsizing. I know my folks are planning on selling their house for a condo to avoid the hastle of maintenance. They simply don’t need the space, although they also don’t need the money. Statistically speaking, my sample size is on the small size, but I can see many boomers thinking the same way.

  17. Wow, what a great site! Such rational discussion and valid points made by many. Thanks to all who have remarked on my post regarding boomers and the real estate market.
    In reply to Joe Q. Garth Turner and others generally throw a number out there that represents the total number of boomers, leaving the impression (falsely) that there is a “scary” number of huge homes about to spill onto the market all at once.
    I agree with many others here that exact numbers are unknown and perhaps unknowable; but that was not my main contention.
    My main contention is that logically and mathematically it can be fairly postulated that the actual volume of McMansion-dumping has been greatly exaggerated.
    Let’s take for example 400,000 retirees per year as suggested here by fellow poster AI R. Right off the top the number can be reduce by 20%, because about 80% of the cohort own homes as elucidated by Joe Q.
    Next, the remaining number of McMansions is further reduced by about 90%, due to the fact that 90% of homes don’t qualify as a McMansion in the first place.
    The number is further reduced by essentially unquantifiable but still logically existent variables. Such as the number of McMansions that are not occupied by older folks, after all not all seniors live in large homes.
    Then we have another unquantifiable number which represents those McMansion-owning seniors who will not be moving at all. Many like having a big home, they entertain alot , their kids and granchildren like to visit and stay overnight and the folks love it that way.
    Many boomers enjoy their neighbourhood and friends. Not to mention that some people just hate to move – the mere thought makes them stressed-out.
    And finally we have immigration. It is false to infer and I certianly did not mean to imply that all immigrants buy homes as soon as they arrive, although many are able due to the fact that the majority are economic migrants – meaning they have money or Canada would not have accepted them in the first place.
    Rather it is the immigrants who arrived here say 5 or 10 years ago who are buying homes now; and it will be the one who arrived here 4 – 9 years ago who will be buying next year etc. Thers is a steady stream that has built up over many years of heavy immigration.
    Cheers.

  18. “When is it enough? I get so sick an tired of hearing about interest rate hikes.”
    Banks don’t make more money off you if rates go up. Most of the time banks make the same spread (profit) regardless of what rates do.

  19. I think the McMansion thing is more of a rhetorical flourish than anything else. They don’t have to be McMansions to affect the market, and even modest homes can be too physically difficult or expensive for a retiree to maintain (as per Howdy There’s post)
    I don’t doubt the logic of your train of thought, but ultimately the data available (cf. the TD survey from Oct 2010 that I quoted above) — 86% of boomers plan to move to a smaller home, half of them to save money — doesn’t support your conclusion, IMO.

  20. Let’s examine this 86% number further. I take that the boomers intend on buying a smaller home, not leave the real estate market?
    If that is the case, then there will be increased demand for smaller homes. The bottom of the real estate market is where it all begins.
    Increased demand in this segment will increase prices, which usually translates into higher prices up the food chain.
    If, on the other hand they are leaving the market to rent in big numbers, which I have seen/heard no evidence of… Time will tell.

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