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If you’re a regular reader of this site, you’ll know I’ve been very skeptical and critical of the Bank of Canada (BoC) for continuing to increase interest rates. It just hasn’t made sense.

The BoC raised rates FIVE TIMES between July 2017 and October 2018. That’s a 1.25% increase. For anyone with a $300,000 mortgage, your payment increased by $189 per month. Or, to put it another way, for every $100,000 of mortgage, your payment went up by around $63 per month.

Yet, we kept hearing that the BoC wanted to raise rates further. Economists and other experts were saying we should expect more rate increases by the end of 2018! Wow!

Well, I just couldn’t believe it. It didn’t make sense to me. How could anyone believe the average person could absorb a mortgage payment increase to this extent? If the forecasts were correct, we could have seen mortgage payments increase by $300-500 per month… and maybe more if you had a larger mortgage!

No, this didn’t make sense. History tells us things don’t move in a straight line, up or down. And, so, standing back with a bird’s eye view, we needed to look again. Rising stock markets sank in 2018. House sales slowed in Canada and the US. House prices were down and up in major urban centres across Canada, and down in many cities in the US. Was this cause for rate hikes or rate drops? Logic isn’t pointing to rate hikes.

What’s happening in 2019?

On January 9th, the BoC held its first of eight scheduled meetings to set the Bank Rate. The rate was held steady and some interesting comments arose from the first speech of 2019.

The BoC is forecasting growth of 1.7% in 2019 – that’s down from 2.1% – but expected to increase to 2% by year end (that’s a forecast and not a guarantee). The world economy has slowed. Demand for oil has also slowed. As a result, oil prices have dropped, creating economic slowdown in Alberta that has now spread to other parts of Canada. These are all signals of potential rate drops… or at least rates holding steady.

Wholesale fixed-mortgage rates are down slightly this week. This is directly related to a significant drop in the Government of Canada five-year bond yield. The bond yields have dropped over 0.6% since November 8th. Fixed-mortgage rates are priced from these bond yields. (By the way, it’s interesting to see that the banks are ultra slow at decreasing mortgage rates, yet ultra fast at raising them.)

While weaker economic news isn’t good, it does produce a positive affect on mortgage rates. When rates go down, homeownership is less costly… and that’s a good thing.

We can expect to see further mortgage rate drops in the coming days and weeks if the bond yields remain at these levels.

We can also expect new variable-rate mortgage pricing to head higher.

Let me explain: variable-rate pricing usually gets worse when rates go down. We saw some record-low variable-rate pricing at prime minus 1% and even prime minus 1.1% last year. This seems to have eased back to prime minus 0.8% or so depending on qualification.

MY ADVICE TO ANYONE GETTING A MORTGAGE TODAY: Don’t jump into that fixed-rate mortgage product without considering a variable rate. Variable rates have proven to be the lower cost option over time. And, if your bank’s calling to offer you a special fixed-rate discount, tell them thanks, but you’d rather speak with an independent Mortgage Broker.

We’ve had reports of bankers calling their clients to renew early or lock into a fixed rate… Look, history has proven that the bank is not your friend. Don’t believe they’re doing you a favour. You should be skeptical. We’ve seen this happen before…

Your best interest is my only interest. I reply to all questions and I welcome your comments. Like this article? Share with a friend.

Steve Garganis: 416-224-0114; steve@canadamortgagenews.ca

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