How much longer until the rates go back up again?!
You’re in the market for a mortgage, right now is most certainly one of the best times to invest. Present interest rates are some of the lowest Canadians have seen in history. We have all heard the famous saying: “what goes down must come back up again” so, you must be wondering how much longer you have until the rates start to rise up again…
The Bank of Canada has promised to keep rates low until June of 2010. It is important to remember that this is conditional based on the inflation rates in Canada. Inflation is simply the rise in prices over time in our economy. Inflation rate controls have been in place since the early 1990s, to help individuals from making rash financial decisions in the wake of hefty price jumps. The Bank of Canada has introduced a monetary policy, which sets a ‘target’ for the inflation rate and the different steps that need to be taken to ensure inflation doesn’t skyrocket. The national inflation rate at the end of October was 0.1, up from -0.9 in September of 2009.
Typically, the Bank of Canada measures the inflation rate based on the total CPI (consumer price index). The CPI essentially is a wide scale measure on the ‘cost of living’. The CPI incorporates items that a normal family would have to purchase on a regular basis. This includes food, transportation, clothing, housing, and some other items. Since the monetary policy was introduced in 1991, the average inflation rate has stayed roughly on the order of 2%.
Having a high inflation rate is not usually a positive thing, especially for consumers. It essentially means that it will cost more for basic amenities. Even with wages increasing, the cost of living is still rising; therefore wage increases can’t necessarily offset the inflation. Current interest rates are a reflection of the overall inflation rate, which is much lower than the average 2% inflation rate. As well, having low inflation (in the negative values) isn’t good, either. It indicates job loss – even though cost of living does decrease.
Of course, the interest rates we see when applying for a mortgage aren’t solely determined by the inflation rate of the country. They are also determined by the “target for the overnight rate”, a rate set to help with stay within the monetary policy target, and the need and availability of money for loans.
So why do interest rates change with inflation? When inflation rates are low, as they are now, interest rates are also low. This stimulates spending by consumers, which ultimately raises the CPI. As the CPI raises, inflation rates rise and in turn raise interest rates.
Right now, the current prime rate is sitting at a mere 2.25%, and the average bank’s five year fixed rate is at 5.84%. At these low interest rates, individuals are actually trying to grab mortgages at the maximum amount they can afford. Additionally, by opting with a longer amortization – they are borrowing for longer (meaning the repayment time is also longer). These two factors are important in helping drive up interest rates. By borrowing more and for longer periods of time, there is less ‘supply’ available for other individuals to take out a mortgage or loan. In turn, this drives up interest rates to try and dissuade individuals from getting a loan/mortgage.
As it seems right now, interest rates will not increase today or even in six months. Prime rate is most likely to remain low until early 2011 according to some of most known senior economists across Canada. We should be very thankful to our Canadian Monetary policy as it is helping us recover from this past recession much faster than most other major countries in the world.
Parmida Modiri, AMP is an Accredited Mortgage Professional with Signature Service Financial. Parmida can be reached at parmida@ssfi.ca or visit her website at www.signaturemortgage.ca. Mortgage Agent, Lic. #: M08005765
