Some good news for those looking to qualify for a mortgage: rates will remain at their record lows for the foreseeable future, as the Bank of Canada (BoC) announced it will leave its trend-setting interest rate untouched at 0.25% in today’s announcement.
The rate has been kept this level as of March 27, 2020, when the BoC slashed it in response to the initial impact COVID-19 had on the economy; keeping it at this record low is one of the methods the central bank uses to protect the economy and encourage spending during a downturn, as was experienced during the first pandemic lockdown. The BoC also announced it will continue to buy back government bonds, effectively pumping $3 billion into the economy on a weekly basis.
What Does This Mean for My Mortgage?
The BoC’s rate – also referred to as the Overnight Lending Rate – is a benchmark used by Canada’s consumer lenders (RBC, BMO and the like) to set their variable borrowing rates, such as mortgages and lines of credit. The banks will increase, hold, and decrease their own rates in tandem with the BoC, which announces its rate policy direction in eight pre-scheduled announcements throughout the year.
Today’s lack of movement means variable borrowers won’t see their mortgage payments change in the near term. Fixed-mortgage borrowers aren’t as directly impacted by the BoC as their rate remains locked in for the extent of their mortgage term.
What Does this Mean for the Housing Market?
Real estate markets across Canada have seen unprecedented sales and price growth over the course of the pandemic; according to the Canadian Real Estate Association (CREA), the average national home price grew 41% year over year in April to a new record high of $696,000.
There are a number of factors driving the hot market – a growing demand for detached houses, lack of supply, and increase in bidding wars to name a few – as well as the fact that it’s cheaper than ever to get a mortgage. While real estate boards have noted there are fewer active buyers than during the peak observed in March, that interest rates are remaining low will continue to support home price growth.
Says the BoC in their June release, “Housing market activity is expected to moderate but remain elevated.”
Related Read: GTA Home Sales Continue to Drop in May: TRREB Report
Strong Recovery Expected for the Canadian Economy
The BoC notes that while many economies, including Canada’s, are poised for a strong recovery post-vaccine rollout, we aren’t quite there yet. It notes Canada’s GDP grew 5.6% in the first quarter of the year, which reflects the resiliency of consumer spending, but that dipped in the second as fresh lockdown restrictions took hold in most provinces. The employment rate remains well below pre-pandemic levels, and women, low-wage, and youth workers continue to be disproportionately affected.
The BoC expects it’ll have to continue its extraordinary stimulus measures until there’s been sufficient economic recovery, which it anticipates will occur by 2022. In the short term, it is watching as exports and business investment improve.
The central bank will even buck its typical inflation target in order to keep rates low in the short term; a 2% growth rate is the threshold it usually uses as a benchmark to justify raising rates. While inflation growth is expected to hover around the 3% mark over the summer, the BoC will stick to its low-rate policy until economic growth is steady and sustainable.
“The Governing Council judges that there remains considerable excess capacity in the Canadian economy and that the recovery continues to require extraordinary monetary policy support,” the BoC states. “We remain committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2% inflation target is sustainably achieved.”
The next BoC announcement is scheduled for July 14, 2021.