As we all know, a change of policy rate has a big impact on the way people borrow. The decision made by the national bank has a major influence on the mortgages as well as private loans, and investment. Let’s take a look at how borrowing can sometimes cost you more.
1. More Increase Expected
For the last one and a half years, the Bank of Canada has tripled its Policy Interest-Rate, with an increase from 0.50% to 1.50%. The Board of the Canadian Central-Bank explains the main reason for the growth as GDP being low compared to the previsions made.
GDP growth prevision has been lowered from 2.2% to 2.0% for 2018, and today’s forecast for 2019 is only 2.1%. The Bank Rate is correspondingly 1.75% and the deposit rate is 1.25%.
2. A Major Risk
Higher interest rates are a real threat for Canada’s economy, as is evidenced by the high proportion of consumers in debt. This may not impact Canadians with low-risk investments such as GICs as much, but the risk is still apparent no matter what. A vast majority of mortgage borrowers have secured their loans on fixed-rate, meaning the increase will severely affect the new borrowers after 2020, according to top prominent economists.
Homeowners with variable-rate mortgages have seen their rates explode over the last year. They only seem to switch on a fixed-rate, as they seem to provide certainty and security over the term of the loan.
3. Protective Regulation
As of January 1st of this year, the Federal government had initiated a “stress test” in order to protect borrowers from bankruptcy. This means that qualified applicants must prove they can afford the MQR rate of at least 5.34%. This mortgage qualifying rate is used to “stress test” mortgage borrowers.
As a matter of fact, we can notice that the number of mortgages fell by 3.4% in the second quarter of 2018 compared to a year earlier, as stress test rules out the young buyers. There is a decrease of 18% in millennial borrowers (aged from 24 to 38). Young ones are struggling to come up with a 20% down payment and to pass such tests.
4. Household Debt Creeps Higher And Higher
Credit market debt is at the highest, reaching 169.1% in the second quarter. In other words, this means that Canadians owed $1.69 in credit market for each dollar of household disposable income. Canadian households owed just over $2 trillion in total.
That number shows how indebted people are dependent on interest rates. The regulations requiring people to show they can service their debt at higher interest rates are a lifesaver in this case.
5. Support From Population Growth
Canada has one of the fastest growth rates of any of G8 nation. Expanding population has just surpassed 35 million, which represents a 1.2% increase over one year. Saskatoon and Regina are the two fastest growing metropolitan areas.
A record of nearly 400,000 people moved to Canada due to international migration. This supports demand for housing, and increases economic potential, but then leads to higher inflation and therefore higher interest rates.
6. A New Way To Support Growth?
The cannabis industry might have a boosting effect on economy due the very recent legalization of the recreational drug in the country. Toronto Dominion-Bank says it could add as much as $8 billion to the country’s economy. This should impact GDP in the final quarter of 2018, even if the bank admits that some of the cannabis-related trade is already accounted for in the economy. It will be interesting to follow the next events.
