Canada’s Finance Minister Warns: Interest Rates Are Going Up

Posted on 26th November 2013
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Canada’s Finance Minister, Jim Flaherty, has said interest rates, which have been artificially kept near-record lows since September 2010, are going to go up over the long term, regardless of what international central banks do.

Because the Canadian and U.S. economies and monetary policies are closely linked, Canada’s mortgage rates tend to run closely with the U.S. housing market. For example, in January 2008, before the U.S. housing market crashed, the interest rate on a Canadian five-year fixed mortgage was 5.89%; today, five-year fixed rates are being offered near 3.79%.

South of the border, in January 2008, a five-year fixed mortgage was offered at 5.45%; today, they are hovering near 3.02%. The Federal Reserve has said it will keep its federal funds rate (which mortgage rates are based on) near zero until the economy improves. That means the Fed is waiting for an unemployment rate near 6.5%; currently, 7.3% of Americans are unemployed.

That said, economists within the Federal Reserve have said they would like to see interest rates kept low until the U.S. unemployment rate drops to 5.5%. On top of that, interest rates should be kept below normal (two percent) until at least 2020.

Meanwhile, the European Central Bank unexpectedly cut its benchmark rate to a record low 0.25% recently, in an effort to prevent the eurozone from slipping back into a recession, and would do so until at least 2015.

Back here in Canada, many have become accustomed to the near-record low interest rate environment. This has helped propel Canada’s biggest housing market higher: sales in the Greater Toronto Area (GTA) jumped by more than 19% year-over-year in October, while home sales increased from 6,713 last October to 8,000 this year. Prices have also been running in step. The average sale price in the GTA was $539,058, up 7.4% from the same period in 2012.

Prices were also strong on the other end of the country. In Vancouver, sales were up 37.8% year-over-year in October and an incredible 7.2% in September. Unlike the GTA, home prices in the Greater Vancouver Area slipped 0.5% year-over-year to $600,700.

On one hand, the Canadian government said it would intervene in the housing market only if it saw bubble-like indicators, which it says are not present right now. On the other hand, the Canadian economy isn’t doing so well that the Bank of Canada can raise its interest rates.

But it will—the question is, when?

The rise in interest rates could negatively impact those who have become accustomed to a low interest rate environment. The mortgage experts at Canadalend.com think it’s important to warn Canadians to be careful when taking on debt, since the cost of borrowing it will eventually start to rise; cutting into their daily expenses.

Whether you’re a first-time home buyer looking to get on the property ladder or you’re looking for a second mortgage or loan, it’s important to work with a mortgage brokerage that has a history of helping their clients achieve both their short- and long-term financial goals.

The licensed, independent agents at Canadalend.com do everything they can to ensure their clients make the most informed decision possible when it comes to getting a mortgage or loan. Canadalend.com agents help their clients get on a stronger financial footing.

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