With 5-year variable rates as low as 2.05% (prime minus 0.80%) and 5-year fixed rates at 2.50%, have we finally hit the “bottom” for cheap mortgage rates?
The general consensus is that the US Federal Reserve (the “Fed”) will be raising rates before the end of 2015, and at the very latest – in 2016. With continuing employment growth and improving business prospects in the US, the Fed will be obliged to raise rates to curb inflation. When the rates are increased, this will force up the coupon rate for US bonds. Canadian bonds will have little choice but to follow suit in order to remain competitive. It is the bond market that sets the fixed rate mortgages offered by Canadian lenders.
The variable rate typically follows the overnight rate, set by the Bank of Canada (BOC). Lenders typically set their prime rate at 2% more than the overnight rate – less any discount. Recent employment statistics suggest that the BOC won’t be lowering their overnight lending rate any further. When the Fed raises rates in the US, the BOC may have a few months – but will eventually be obliged to follow the US trend.
What do you think … are rates only going to go up from here?