Bank of Canada rate hikes are imminent – and mortgage holders are rushing to avail of last-minute low rates
With a Bank of Canada benchmark rate increase seemingly inevitable in its next announcement (March 02), one of the most notable mortgage trends of late has seen homeowners reassessing their options and pondering a possible refinance.
While it might be assumed that mortgage holders would instinctively choose to lock into a fixed rate as that Bank rate begins to climb, one prominent member of the mortgage industry in Quebec has noticed a different development: clients seeking a refinance to take advantage of the current rock-bottom variable rates that won’t be around for much longer.
Ryan La Haye (pictured top), president at the Quebec-based RLH Group brokerage, told Canadian Mortgage Professional that he’d seen many clients since the turn of the year opting to refinance to get a deeper variable pricing, with the spread between variable and fixed options still extremely wide – meaning they could face a hit of around 1% if they switch to a fixed rate.
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“You have the other option: you could go down to a 1% [variable] and basically buy yourself three or four Bank of Canada increases before you’re actually back to the same place,” he said. “You have a big spread to protect yourself against potential future rises. A lot of people are buying into that since right after the holidays.”
La Haye added that doomsayers anticipating a large number of rate increases this year in Canada were likely wide of the mark, with little indication that the central bank would risk any more than a handful of hikes in the current economic climate.
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At the beginning of 2020, the Bank’s policy rate sat at 1.75%, before being slashed to 1.25% in early March that year as the COVID-19 pandemic took hold in Canada. Just weeks later, it further plummeted to 0.75% and then 0.25%, where it’s remained throughout the pandemic.
La Haye said there was little chance that the Bank would decide to quickly hike the rate above those pre-COVID levels, a move that could risk derailing the country’s economic recovery from the pandemic.
“I don’t think that the economy is going to be able to absorb much more than three [rate increases] this year, maybe four, but I definitely don’t see it going higher than pre-pandemic,” he said.
“That would be surprising that you would normalize rates and kick them up higher than the pre-pandemic level considering the level of debt – both government, and the mortgage sizes and spending that occurred in housing.”
Inflation has been a hot topic in Canada in recent months, with pressure building on the central bank to hike rates as that measure reached a 30-year high in December. Consumer price inflation in that month hit 4.8%, according to Statistics Canada.
La Haye said it shouldn’t be assumed that a move away from current low interest rates would be a catch-all solution for inflation, with other factors potentially coming into play as a reason for those elevated inflation figures.
While the frenzied housing market was undoubtedly fuelled by record-low rates, he said, they didn’t necessarily impact other areas of consumer spending as much as unique COVID-19 circumstances did.
“I think the main thing that everyone should be looking at is how the normalization of interest rates from the Bank of Canada is going to impact inflation. I don’t think it will,” he said. “The issue of gas prices, food or clothing – everything that’s rising – I don’t think this is consumer-driven as much as it’s pandemic-driven.
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“It was a change of consumption from a relatively 50-50 split between products and services, but with service no longer available in restaurants and hotels and no travelling, everybody cut their spending and just flipped it to products – and distribution lines are not able to handle that kind of volume.”
Overall consumption was still relatively similar to its pre-pandemic levels, he noted, but had simply been redirected – meaning that the Bank of Canada hiking rates may not necessarily lead to any significant change on that front.
That could have some striking consequences for the Bank’s ability to get the inflation problem under control, with a possible significant shift in Canada’s economy potentially in the offing if it can’t, La Haye said.
“How will the Bank of Canada’s rate increases really have an impact on inflation and if it does not, then what’s in the cards?” he said. “Is the current system sustainable? I think that’s a very big question. Nobody’s talking about the sustainability of our current system on monetary policy, debt and how this perpetual consumption obsession is continuing.
“I think we’re starting to get to an inflection point where we’re not going to be able to really survive in this same system that we have right now – and I think that’s going to be shown in the next year. That’s what concerns me the most.”
