December 28, 2018

How the USMCA Will Affect Mortgage Rates

In October 2018 Canada and its closest trading partners – the United States and Mexico – agreed to a new trade deal, which will replace NAFTA, called the United States-Mexico-Canada Agreement (USMCA).

While the new deal is expected to have far-ranging implications for many industries, including the auto and dairy industries, it has also impacted Canadian mortgage rates. Let us explain.

But, first, a backgrounder on the USMCA

During the 2016 US presidential election, future President Donald Trump promised to re-negotiate or even axe the North American Free Trade Agreement (NAFTA), which had been in place since January 1, 1994. 

Negotiations for the new agreement ended when it was signed on November 30, 2018. It’s similar to NAFTA (with some colloquially referring to it as NAFTA 2.0) but gives the United States greater access to Canada’s dairy market and encourages more domestic production of motor vehicles. It also increases labour and environmental regulations and includes updated intellectual property protections.

So, what does this have to do with mortgages?

One of the big questions for aspiring first-time homebuyer is how much mortgage can I afford?

There are many factors that will determine this; home prices, income, down payment amount, and interest rates. 

And the trade deal is expected to have an impact on one of those factors: Mortgage rates.

Rates on the rise

You may have heard that Canadian mortgage rates are on the rise. 

The Bank of Canada has increased its benchmark for the overnight rate three times this year; increasing it from 1% to 1.25% in January, to 1.5% in July, and to 1.75% in October. 

Meanwhile, the best five-year fixed mortgage rate was 2.79% in January 2018. It jumped to 3.13% by August; 3.19% by October; and currently sits at 3.29%. 

Prior to the latest Bank of Canada rate increase, trade uncertainty was one of the major factors cited by the Bank for maintaining its policy rate. Meaning the Bank held off on increasing its benchmark rate – which impacts mortgage rate fluctuations – until a deal was agreed to.

This was the Bank’s comment in July: “As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports. This effect is now judged to be larger, given mounting trade tensions.”

And, in September: “Recent data reinforce Governing Council’s assessment that higher interest rates will be warranted to achieve the inflation target. We will continue to take a gradual approach, guided by incoming data. In particular, the Bank continues to gauge the economy’s reaction to higher interest rates. The Bank is also monitoring closely the course of NAFTA negotiations and other trade policy developments, and their impact on the inflation outlook.”

Finally, this is what it had to say in October, following the announcement of the USMCA: “The new US-Mexico-Canada Agreement (USMCA) will reduce trade policy uncertainty in North America, which has been an important curb on business confidence and investment.”

The Bottom line

The Bank of Canada waited until Canada agreed to a new deal with its closest trading partners before continuing with its intended policy of raising rates. 

Now that a deal has been struck, however, mortgage rates will further increase if and when the BoC decides to continue hiking its own target rate.