3 Reasons We Will NOT Get Another Rate Increase

Published on 14th November 2017

That title is a real attention-grabber right? Before you continue reading, let me preface this insight with the fact that I am not an economist, financial analyst, nor do I have a crystal ball. I am, however, an investor and realtor who cares about how external influence and factors may affect my assets, my business, and my clients. So personally, I always do my due diligence.

Although there has been a surge of activity in the fall market of 2017 (which was expected) many are still worried about investing in the real estate market because of the potential for another looming interest rate hike.

Before I go full nerd mode on you for this article, I want to provide some background information so that you can follow along.

The variable rate mortgage, which I still recommend for most people to use, is based on the Bank of Canada’s (BoC) overnight rate. Your mortgage lenders will create a mortgage product and rate that fluctuates with that BoC rate. Just because the BoC increases the rate doesn’t always mean the lenders will as well. But of course, most of the time, banks will increase the rate as well because let’s face it, why wouldn’t they want to make more money?

The fixed rate mortgage, which I only recommend if you never plan to sell or utilize the equity that you’ve built in your asset, is based on the bond market. We are likely going to see an increase in the bond rate soon, but more on that another time. Being the northern neighbours of the US, a lot of what the Federal Reserve (i.e., the US-equivalent of the BoC) does also greatly impacts Canada.

Now that the background info is out of the way, here are the 3 reasons why I am speculating that we will NOT be seeing another interest rate hike this year. Drum Roll, please….

1) In the past, the BoC has followed the Federal Reserve (“the Feds”) quite closely for many reasons. The BoC has only veered away from Feds a few times, but it often quickly changes their tone and they end up giong the same direction as the Feds. Last week, the Feds met and they chose NOT to increase their rate despite the staggeringly low inflation. So even with just this correlation alone, it’s already looking good for Canadian interest rates.

2) The BoC has 8 meetings annually. This is when they get together to discuss many things, one of them being the overnight rate. We have two of these annual meetings left in 2017, one in October and one in December. We’ve rarely seen the BoC increase their rates in December. If the BoC follows the direction of the Feds’ decision to stay put with rates, there may be no hike from the BoC October meeting.

3) If anyone has been following this interest rate debacle all year-round, you’ll know that the BoC telegraphs their moves waaaaay in advance, and very vocally as well. The BoC is equivalent to a terrible poker player or a movie with obvious plot foreshadowing. They have been much quieter as of late with this next potential interest rate increase than they have been on the last two.

Having said all the above, if something catastrophic happens globally that inherently affects Canada, the BoC may increase interest rates in October. Besides that, I don’t think another rate hike is coming this year. Suffice to say, I do believe that their next move will be another increase – just not this year. These rates have been at record lows for a long time now and both the Feds and BoC are preparing for another recession.

Remember, even if a rate increase does happen, as a real estate investor, if you can overlook that additional $13 dollar per $100,000 mortgage per month (based on a 0.25% increase) and focus on the big picture, you’re still ahead in the long run because you control and own an income-producing asset – which is why we’re all in the real estate game anyways right?!

Until next time, Happy Real Estate-ing!
Zhen

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