After keeping interest rates steady for just over a year, the Bank of Canada has clearly hinted that interest rates will be going up in the near future:

On balance, the Bank judges that there is an increased risk that future inflation will persist above the 2 per cent inflation target and that some increase in the target for the overnight rate may be required in the near term to bring inflation back to the target.

The prime rate, which is currently at 6% and moves in lockstep with the Bank’s overnight lending rate, will also likely be heading higher this summer. Consumers can expect to pay more interest on loans and variable rate mortgages.

Yields are also rising in the bond markets. The yield on 5-year bonds has risen from 4.01% at the beginning of this quarter to its current level of 4.54%. The interest rate on fixed-term mortgages, which are tied to bond market yields have also been inching up of late. Consumers whose mortgages are coming up for renewal will be paying more than they would have just one month back.

This article has 19 comments

  1. I’m not quite sure that Bank of Canada will increase prime rate. As the Canadian dollar is very strong, it will just contribute to hurt Ontario and Quebec’s economy. The country is really getting divided in two separate section. Western where economy grows and risk of inflation is eminent and the rest of Canada where most companies depend on a low dollar to export their goods. It is definitely not an easy choice for the Bank of Canada.

  2. Tough to say, three months ago it seems like rates would be lower by the end of the year. Now they will be higher…

    I wouldn’t bet the bank (no pun intended) on predicting interest changes.

  3. Canadian Capitalist

    Mike: Predictions of any sort are hazardous. Still, I find it interesting that the Bank is hinting at a rate increase after more than a year on the sidelines.

  4. I’ve been considering buying another property (either as another investment or as a principle residence) so the .25% hike has me bummed out that I didn’t get my butt in to a mortgage consultant for a pre-approval.

    Of course, if it goes higher, I’ll be more bummed that I didn’t go in now 🙂

  5. Am I ever glad that I recently purchased a home at just the right time. I had a pre-approved rate locked in at 5.29% and the final amount was 5.09% during that small dip a while back. I purchased at just the right time from what it looks like.

    Of course, things change quickly, so in 5 years when I’m up again for some renewing, maybe it’s my lender that will be having the last laugh.

  6. Canadian Capitalist

    Cheap, not sure what you are saying. BoC has not hiked interest rates yet. They are hinting that they might increase rates in the future. In any case, the BoC rate hike will only affect variable rate mortgages (and your lender will adjust the rates anyway).

    Fixed mortgage rates have already been adjusted upwards because bond yields are up.

  7. I assume Cheap means that he should have gotten pre-approval for a fixed mortgage a couple of weeks ago (like I did). The pre-apps are good for 4 months now.

    Traciatim – that’s a great rate – I just got a 5 yr for 5.19%. I think if someone was applying today they might be looking at around 5.44% (ING rate minus 5 bps).

  8. Obviously real estate markets are slow to adjust and far from efficient, but….

    It’s better to buy when interest rates are high. When rates are low, the cost of borrowing is low which causes increased demand and drives prices up. When the cost of borrowing is high, demand is lower which pushes prices down.

    Over time, interest rates fluctuate around a mean. If you buy when interest rates are below the mean, there’s a good chance they will be higher when your mortgage comes up for renewal. Whereas if you buy when rates are high, there’s a good chance they will be lower when you have to renew.

    Therefor, if you buy when rates are low, you pay a higher price (which means a bigger mortgage) and over the course of the mortgage you will end up paying higher interest anyway as rates revert to the mean. Whereas if you buy when rates are high, you pay a lower price and end up paying lower interest when rates revert to the mean.

    The short-term benefit of lower interest is priced into the market. When your mortgage comes up for renewal, you will be paying higher interest on the original loan amount, but the value of your house will be discounted to compensate for the higher borrowing costs. Whereas if you buy when rates are high and prices are discounted, the value of your house will go up and your payments will go down.

  9. Keep an eye on bank stocks too- they tend to be affected negatively by interest rate hikes in the short term.

  10. I’m currently on the other end of that trade right now. My mortgage is all paid off and I’m about to wipe out my Line of Credit in the next few months (it’s an investment loan so the interest is tax deductible, therefore I’m in no rush to wipe it out). I’ve been stockpiling all of my new cash into cashable GICs inside my brokerage account which are now yielding just a hair over 4% while I wait for the stock market to tank. The higher the interest rate goes, the more likely equities will tank and the higher the yield I’d get on my GICs. So I say “bring it on, baby”…

  11. CC & 4P: Yes, 4P understood me exactly. Its so nice to have an interpretor to decipher my ramblings and make them coherent :-).

    Traciatim: I also got a 5 year fixed during that little dip (5.05% baby! :-). If you have prepayment privileges or if you can increase your payments you’ll be able to take advantage of it if there’s a rate drop…

  12. I agree that its best to buy a house when interest rates are high. Why? Because mortgages typically have embedded call options, which are in the form of pre-payment priviledges.

    When rates are high, house prices become discounted significantly, meaning that the overall mortgage interest expensive, on average, is not substantially higher than when interest rates are low.

    Further, the usefulness of those embedded call options becomes much greater when the rate on a mortgage is high. Why? Because when interest rates eventually go down, you can merely exercise those options and pay down the loan faster, while the house, in theory, should have appreciated significantly.

    But if you get a mortgage at a low interest rate, and if rates go up, it would be stupid to pay the mortgage down, hence, those call options are essentially worthless.

    Odds are, in a low interest rate environment, interest rates can’t go lower. But in a high interest rate environment, there is always a significant possibility of lower interest rates.

  13. I whole-heartly agree with Aleks and Mark on this one. As a new buyer this seems like common sense when reflecting on a supply and demand market. If your ultimate goal is to pay less in the long term, it would seem your initial signing price must be low vs the market value. If such market value changes (not fixed as many goods and services are), then why not wait for that change?

    If only I could find the details/proof to convince the rest of the extended family (tack on in-law on the title) that I’m not crazy for waiting. This in stark contrast to the newspaper/tv screaming buy now (or forever die homeless). Let those interest rates rise!!

  14. june 19,2008

    Interest rates will decline untill it reeaches zero.If you disagree<please state why

  15. I fully agree! as a young (almost) first time buyer living in Kelowna all i hear is buy buy buy. missing the 2003-2007 boom. I found myself almost locking in on a 40 yr mort with $0 down on a condo going for $259900. But after CMHC and transfers i have a mort of $270 k on a place worth 259900 is an already slower market, and after $1400 payments then condo fees ect looking at $1800 per month for a 900 sq ft condo. 5 years if rates are 10 or 11% i simply couldt not afford it unless i am earning much more then i do.

    I think for anyone waiting untill they can afford to buy and love what they are buying going into it knowing it inst just an investment buying isnt always the best.

    having 10% or more down and paying if off as fast as you can seems to make sense

    Buying for the sake of owning isnt always the best option

  16. How ya like dem Int rates now MoFo

  17. aetgyhftghfgh

  18. Hahaha wow…talk about being wrong 3 years ago