At the end of January, the Bank of Canada held its target for the overnight rate at the effective lower bound of 0.25%, with the bank rate at 0.50% and the deposit rate at 0.25%. This means that the Bank of Canada rate stayed the same, which means variable rates will also remain unchanged for now. I know that many Canadians have been tuning in to the speculations and as Mortgage Brokers, we are receiving many questions about variable rates and how much longer they will remain this low.
Although the recovery from the COVID-19 pandemic has been strong in some regions, there are other regions where it has not been strong. The US economy is growing at an exponential rate, but China’s economy is struggling due to its weakness in its property sector. Globally, we also see a supply chain issue that has hindered production and is pushing up inflation to levels unseen since the financial crisis in 2008. Lastly, global tensions, specifically the Ukraine-Russian tension, are causing some uneasiness in the stock and crypto markets.
Housing prices are currently very high, and the elevated housing market activity puts upward pressure on house prices. This will make it even more challenging for first-time homebuyers to enter the market. Buyers are facing high pressure, with multiple offers on property being the normal occurrence, some offers far above asking price and/or without subjects in place. As mortgage brokers, we are seeing the challenges our clients are facing when participating in this market. As the home prices rise due to this behavior, it makes purchasing (especially for first time buyers) more and more unattainable.
Looking at the good news: oil prices have rebounded to well above pre-pandemic levels, and GDP growth in the second half of 2021 now looks to have been even stronger than expected. There has been strong employment growth, a tightened labor market, higher hiring intentions, and wage gains are elevating.
Although the COVID-19 recovery is far from over, there are a lot of positives to look forward to in the coming months. Life is starting to stabilize, and with that, the stock market, inflation rises, and housing prices could see a flattening out in the months to come. Inflation is likely to decline reasonably to 3% by the end of this year and ease back towards the target over the projection period. Expect longer-term inflation to go back to the 2% target. The bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.
While the pandemic has been very unpredictable from the start, we expect this stabilization to enter a longer-term stage alongside the economy’s growth. We expect the economy’s movement to be less affected by potential new variants in the future, but there is still the possibility that things could shift.
We expect the Bank of Canada to increase the rates in March during their next scheduling meeting, and we will continue to update you as we hear more. We want to assure you to not stress over the potential Bank of Canada overnight lending rate. If you have a variable mortgage, you are paying significantly lower rates than fixed rates.
We are expecting a series of 0.25% incremental increases over 2022. If you are wondering how, it will affect you, let’s break it down:
If your Mortgage balance is 400,000 with a 30-year amortization, then for every $100,000 owing, your monthly payment will increase by about $13 – translating to roughly a $52 increase per month.
If you are feeling uneasy about these increases, then did you know that there are variable rate products on the market that allow the payment to remain consistent while enjoying the benefits of the variable rate gamble? You can also lock in your rate and convert it to fixed directly with the lender which is a great option if you see variable rates rising and have reached your threshold.
These are big questions and if you have any questions at all, please reach out to us, and we will do our best to answer them in a timely matter.
Uncertainty can be stressful and at GLM Mortgage Group, we are always available to answer questions and update our clients regarding their mortgage, current rates, and market conditions to make educated and informed decisions about their financial livelihood.