The message now set in stone was reiterated recently, loud and clear: cheap money is here to stay. For at least the next 2 years, the Bank of Canada will keep its record low interest rates steady at 0.25% or until we hit 2% inflation. Bank of Canada Governor Tiff Macklem was unambiguous: “Our main message today is that it will take quite some time for the economy to fully recover from the Covid-19 pandemic, the Bank of Canada will keep providing monetary stimulus to support the economy through the recovery.” The Bank also made the bold but widely held statement that economic growth will hit 4% on average in 2021 and 2022. As inflation continues to fall below the Bank’s 2% target, it sees no issue from an inflationary perspective in keeping rates this low, and it sees the low rates as being crucial to supporting long term economic recovery, loose fiscal policy, and a stable housing market in the months and years to come.
The big winner from the clear and definitive announcement will be fixed 5 year mortgages, whose rates will now fall because of the long term certainty the Bank’s announcement provides. Homeowners with floating rate mortgages won’t see much benefit from the reduction as rates are already effectively as low as they can possibly go. The only alternative is for the Central Bank to pursue negative rates (where it would pay you to borrow from it). Surveys show that most new prospective homebuyers say they will opt for 5 year fixed rate mortgages given their growing attraction and certainty. According to ratehub.ca, Meridian Credit Union is offering a fixed rate 5 year mortgage at 1.60%. TD Bank is offering 1.94%, the lowest of the big five banks. RBC’s 2.22% fixed rate five year mortgage is the highest.
To put those figures in perspective, a $550,000 home mortgage with a 20% down payment would cost the average home buyer $1,800 a month to service. This is considerably less than the average base rent costs in Toronto. (We’re not including property taxes, utilities, insurance, etc.), but the low nature of these rates is incredible. If housing cost what averages were in1990s ($300K), a monthly mortgage would cost $1,000 to service with a 20% down payment. The BOC’s announcement will provide clear psychological and fiscal stimulus for the Canadian housing market for years to come.