Bank of Canada Governor Stephen Poloz makes reference to the “new normal” in a CBC interview that took place in mid-July.
Talk of a “new normal” for low interest rates must seem appealing for Canadians holding variable rate mortgages. The last time the Bank of Canada made any changes to its Overnight Lending Rate, the rate primarily used to dictate the cost of lending between banks and for Canadian home-owner’s variable rate mortgages, was in September 2010.
The difference between variable rate mortgages and fixed rate mortgages is significant. The spread between a 5 year fixed rate mortgage and a 5 year variable rate mortgage today ranges between 0.40% – 0.60% – a difference which has actually been greater in the past. While half-a-percent does not seem like a tremendous difference, a mortgage holder with a $300,000 5 year fixed rate mortgage arranged in September 2010 has spent approximately $20,000 more in interest than his or her counter-part who took the variable rate option. Certainly not an immaterial sum of money over 4 years.
Concerns regarding Canadians’ household debt has the Bank of Canada boss researching a “neutral interest rate” policy moving forward – indicating a potential plan of action where the Federal body neither takes actions to stimulate, nor restrain economic growth in Canada.
“The new normal….is probably going to be lower than what we thought in the past,” stated Poloz during his CBC interview.
The Bank of Canada is of the position that a spike in interest rates could have have a negative effect on the recovering Canadian economy. Although household debt in Canada has been steadily decreasing in recent quarters, debt levels still remain high.
“You believe the economy will, by mother nature, kind of rise back up and grow at a steady pace, but what’s been holding it back is this lingering uncertainty about what the future holds.” says the Governor of the Bank of Canada, Stephen Poloz
Although fixed mortgage rates have certainly come down since September 2010, where they hovered in the 3.89% mark, the spread between fixed & variable rate mortgages still offer options to home-owners today. Especially in an environment where the Bank of Canada has conditioned Canadians to expect today’s rates to be the “new normal”.
As always, speak to a qualified mortgage professional prior to making any changes to your existing mortgage.
For further information regarding the monetary policy decisions of the Bank of Canada, pay a visit to the Bank of Canada Youtube channel here.
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