We spend a lot of time thinking about interest rates and searching for the signs of change to advise our clients accordingly. We give our clients the best advice on new mortgages and locking in or holding tight on variable-rate mortgages. Some of the indicators we look for are policy changes from the Bank of Canada - the crown corporation responsible for the economic and financial welfare of Canada. There are several ways that the Bank of Canada indirectly influences mortgage rates.
The Policy Rate
The Bank of Canada makes announcements eight times per year (in January, March, April, May, July, September, October and December) about its so-called policy rate or overnight rate. The policy rate is the interest rate banks are allowed to charge each other for short-term transactions. This is not the same as the mortgage rates banks offer to homebuyers. Though, if you have a variable rate mortgage, your mortgage rate should increase or decrease by the same amount as the policy rate change.
Early in the pandemic, the Bank of Canada lowered the policy rate several times to help support the economy going into lockdown. Those homeowners with variable-rate mortgages benefited from their payments decreasing accordingly. The reduction to a historically low policy rate resulted in the banks lowering fixed mortgage rates. First-time homebuyers took advantage and started shopping for homes in droves.
The Inflation Factor
The Bank of Canada uses policy rates as a tool to achieve its primary objective - keeping inflation within a target range of 1.75% to 2.75%. When inflation rises, the increasing cost of goods can cause problems for lower and middle-class families. When inflation is too low, wages begin to decrease, and the entire economy slows.
As the Canadian economic recovery from the pandemic continues, inflation has risen above expectations over the summer of 2021. However, the Bank of Canada has taken the position that it is a temporary problem and is too soon to raise its policy rate in response.
Manipulating the Money Supply
Beyond the policy rate, there is another way that the Bank of Canada can influence inflation and, therefore, mortgage rates. It's known as quantitative easing and involves the bank's large-scale purchase or sale of government bonds. Doing so either increases or decreases the money supply, resulting in respectively lower and higher borrowing rates. Government bond rates are one of the largest factors ultimately determining mortgage rates for consumers.
When the Bank of Canada began lowering policy rates to help bolster the economy in 2020, there wasn't much room to maneuver. The policy rate was already very low. So it began an aggressive program of quantitative easing, buying billions of dollars in government bonds from the market to help increase the supply of money. This allowed banks to remain profitable and gave businesses and families access to cheaper credit.
In August 2021, the Bank of Canada recently announced that it would begin to scale back the amount of quantitative easing. This will slowly taper the growth in the money supply and eventually result in slightly higher interest rates, including mortgage rates.
Shop Around with a Mortgage Broker
As Canadian mortgage professionals, keeping our antennae up for any signals in the economy of changing interest rates is what mortgage brokers do. However, Mortgage rates are not dependent on only one or two factors. It's a complicated decision made by lenders based on their funding costs. That's why it is important to shop around to find the best mortgage rates available to you when you finalize your mortgage. Whether you choose fixed or variable rates depends on your needs, but a qualified mortgage broker can advise you on which way to go.
In Niagara Falls, call Dave Destefano of the Mortgage Group for expert advice and professional help finding the best mortgage at the lowest mortgage rates.