Is It Last Call for the Low-Interest-Rate Party in Canada?

Posted on 26th June 2013
Tags: bank of canada, interest rate, government,

After five years of historically low interest rates, Canadians are beginning to realize the low-interest-rate party is about to end. In 2007, Canadian interest rates fell to near-historic lows after the U.S. housing bubble burst. Now that the North American economy is regaining its health, interest rates are starting to rebound.

For example, in May 2007, a five-year Government of Canada benchmark bond yielded 4.53%. Since then, government interest rates in Canada have been dropping lower; by May 2011, the yield had fallen to 2.4%, in May 2012, 1.31%, and in May 2013, it dipped below 1.2%.1

But, Canadalend.com warns, Canadian homeowners shouldn’t get used to these historic lows. In fact, over the last few weeks, interest rates have turned a corner and are now rising at their quickest pace in years.

On Friday, June 21, 2013, a five-year Government of Canada benchmark bond returned 1.81%. That means that since this past May, the yield on a five-year Government of Canada benchmark bond has climbed 50%! Additionally, since May, the seven-year Government of Canada benchmark bond has increased more than 50%. While a 10-year Government of Canada benchmark bond has also increased approximately 50%.2

It’s important to be aware of the Government of Canada benchmark bond yields because they are the rates at which retail banks borrow money from each other and form the basis for saving and lending rates that get passed on to customers.

Why the sharp increase? On June 7, Statistics Canada showed that the Canadian economy had added 95,000 new jobs in May—a number much higher than previously forecasted. That high number is a strong sign that the Canadian economy is doing well.3

But perhaps most significant, on May 22, the U.S. Federal Reserve hinted that it was going to begin tapering off its $85.0 billion per month quantitative easing (bond buying) program. Furthermore, the Federal Reserve said it might end the stimulus program altogether in 2014.

As soon as the largest economy in the world—the U.S.—announces it is improving, interest rates in Canada will to start to tick higher, Canadalend.com observes. If this last month is any indicator, the rates could begin rising more quickly than many Canadians expect, which might negatively impact unprepared Canadian borrowers.

What that means is that anyone with a variable rate loan will have to pay more each month—stretching already strained budgets. For example, if you have a $100,000 mortgage, every one percent increase in interest rates translates into an annual increase of $1,000.

Today, most of the big banks charge prime plus one percent for a five-year variable rate mortgage; for example, with prime at three percent, that would mean you pay four percent. So, with the economy improving, banks are going to start charging more to borrow.

How high will interest rates go? Back in the fall of 2007, just before the U.S. housing bubble popped, the prime rate in Canada was around 6.25%. That means that a variable mortgage rate cost the average Canadian 7.25% to carry—81% more than today.

Besides up, where does Canadalend.com see interest rates heading? Over the short term, it wouldn’t be a surprise to see them return to their pre-recession highs from earlier in 2007.

To avoid paying the higher interest rates that are on the horizon, first-time homeowners and those looking to refinance should consider contacting their local Canadalend.com agent and seeing about locking in a longer term mortgage now.

At Canadalend.com, our experience has taught us that, when it comes to picking a mortgage, it’s better to be proactive than reactive—do whatever you can to save your money from rebounding interest rates. Whether you need a big or small mortgage, want it to be fixed or variable, Canadalend.com’s independent, licenced agents can help navigate the often confusing world of mortgages.

In fact, because Canadalend.com agents are independent, they are able to work with all the major banks and lending institutions to help you pick the financial products that best suit your budgetary needs. Our agents will also try to get you approved in 24 hours.

At Canadalend.com, we want to help you achieve your financial goals—both now and in the future. Take advantage of lower interest rates while you still can, and contact your nearest licenced, independent Canadalend.com agent.

Sources:

    1. “Canadian bond yields: 10-year lookup,” Bank of Canada web site, last accessed June 25, 2013,http://www.bankofcanada.ca/rates/interest-rates/lookup-bond-yields/ .

 

  • “Government of Canada marketable bonds – average yield – 1 to 3 year,” Bank of Canada web site, last accessed June 25, 2013, http://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/ .
  • “Labour Force Survey, May 2013,” Statistics Canada press release, June 7, 2013, http://www.statcan.gc.ca/daily-quotidien/130607/dq130607a-eng.htm.

 

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