Super Low Interest Rates Coming to an End

The low interest rate party that Canadians have been enjoying is coming to an end, say some economists and Canada mortgage brokers. It’s not all bad news – rates are expected to stay below 5% for the rest of the year and we’ve enjoyed a long run of 5 years at low interest rates. No one knows how high the rates will go after such a long break, but the cost of money can’t stay low forever, can it?

But what do lower interest rates mean in the grand scheme of things? Yes, mortgages will cost us a little more, but why does the economy rely so much on interest? Who calls the shots when it comes to changing interest rates? Let’s find out.

It Came from the Bond Market

When most of us think about interest rates and inflation, we’ll look to the central banks for answers – but the short of it is that this isn’t where the action is. The bond market is actually what really decides interest rates in the long term. It will almost always determine how things will swing six months to a year before the Bank of Canada acts; it’s not that BOC is slow on the uptake, it’s like this globally where central banks operate. A few weeks ago in the US the Federal Reserve announced that it was going to stop its QE policy in favor of heating up the economy.

Super Low Interest Rates Coming to an EndFed Reserve to End Quantitative Easement Policy by mid-2014

What is QE or quantitative easement, and why should it affect Canadian interest rates?

Ask any Toronto mortgage broker what they think of rising interest rates, and they’re going to look unhappy. It’s a necessary evil though, and as the American market moves so does the Canadian market.

The Americans had to pull back on their QE program which bought up $85b worth of treasury bonds and securities every month; interest rates remained so low that it was keeping the economy in a recession-like state – but this also means interest rates will begin to rise and the effects will be felt on this side of the border.

Canadian and American markets have been tied in tandem for the last 50 years, but we’re beginning to see a divergence. In years past this would have shaken the housing market to the core, while this time around it’s going to be a slight bump in interest rates.

Won’t be an Overnight Change

According to most Canada mortgage brokers and economists, this won’t be a rapid change overnight. Like most things in the financial industry, it’ll be months before the Bank of Canada acts to do something about this. Over time the rates will begin to go up and up; if you have an ARM that’s going to mature in the next five years you may want to see if you can convert it to a fixed rate mortgage while interest rates are still low.

Preparing to buy a new home? Visit today and browse thousands of listings!

Author Bio:

Danny Papadopoulos is an experienced agent of Mortgage Central and an avid blogger for Homebase Mortgages.  HBM is a Toronto mortgage broker that provides home mortgages, mortgages for the self-employed, home equity loans and lines of credit, debt consolidation, private mortgage and second mortgage lending.

Leave a Reply

Your email address will not be published. Required fields are marked *