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Bank of Canada Again Maintains Interest Rates at 1.75%

The Bank of Canada announced today, January 9 2018, that they won’t be raising the overnight interest rate, keeping it at 1.75%.

There’s been a lot of speculation as to whether the Bank would or wouldn’t raise rates, especially as there have been 5 increases since mid-2017. The longest period of time between two increases since mid-2017 was 6 months, and the shortest was just under 2 months.

Last year, many experts agreed that rates were going to continue going up in the new year. That belief was based on a few important factors:

1.     The economy was doing well, but had started to slow down

In 2016 and early 2017, the economy was screaming ahead. Real estate prices reached their highest ever in April 2017, and many people were refinancing, selling, and buying homes. Despite the prices being higher than ever, the number of listings and sales were also through the roof.

The skyrocketing prices began to fall after April 2017, along with the number of sales, before getting a small boost by buyers looking to get a property before the new mortgage stress test rules were put into effect in 2018. All of 2018 was a muted year for real estate, except for condos, which alone stood out among all property types as the most profitable.

Oil, one of the key resources in Canada, saw prices drop sharply in the second half of 2018 after recovering slightly from the drop in 2016. Alberta was already suffering enough from the last drop and subsequent Fort McMurray real estate crash before having to deal with this latest decrease.

NAFTA negotiations, America’s rising tensions with China, the tech sector crash, and other news like the GM plant closure also put a huge damper on the Canadian economy rather quickly. This forced that Bank of Canada to reconsider its stance on interest rate increases.

2.     Canadians reached peak personal debt

Canadians have some of the highest debt in the world per capita. The Bank of Canada knows that every increase means that Canadians will have to pay more per month when their budgets are already stretched.

We still owe an average of $1.78 for every $1 in disposable income we have. The most debt we held collectively topped out at $1.81 for every $1, but has started to creep back up after a little drop.

If the Bank were to raise rates too quickly for people with debt to adjust, it could force them to miss payments or even go bankrupt.

3.     The Americans were raising rates

No matter what you think of the American president, it’s no secret that our economy is incredibly reliant on the American’s. When they’re doing well and buying lots of our exports like softwood lumber and oil, we do well.

Normally when the Federal Reserve raises interest, our own Bank of Canada is soon to follow. Because the latest Fed rate increase was in September, many believed it primed us for an increase as well.

 

What does this mean for my mortgage?

For the short term, it’s good news. Variable-rate mortgages won’t become any more expensive for the time being, and homebuyers looking to get into the market will have more time to think as rates are staying low.

In the long term, this is just a delay of the inevitable. Rates will have to rise eventually. No one knows when or by how much, but rates have been so low for so long that we’re probably overdue for an increase.

The trouble is that as long as rates are low, some people will take on a lot of debt because it’s so cheap. Then when rates go up, they’ll be in hot water.

To avoid getting burned by a rate increase later, you might want to consider paying extra on your mortgage while rates are low. Extra payments on debt are more effective at saving money the sooner they’re made, as they reduce the amount you’re charged interest on.

Let’s say you have 5 years remaining on your mortgage, and your balance is $100,000. If you pay an extra $10,000 at the start of the term, you’d save $873 in interest. If you paid the last $10,000 as a lump sum instead, you’d only save $140 in interest!

You’d save even more if you have a variable-rate mortgage and rates go up in the middle of your term, since you paid down debt at a lower interest rate earlier.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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