Bank Governor Stephen Poloz explains decision by commenting on strength of economy
It is possible for rate to change again in early September
By
Mark Schadenberg
There
are many indicators tracked by economists to know exactly where monetary trends
are going. Important gauges include interest rates, unemployment percentages,
stock market fluctuations, dollar versus dollar analysis, inflation numbers,
exports compared to imports, and even the price of crude oil.
Interest
rates have been almost chiseled in stone for the past 6 years as the Bank Of
Canada (BOC) hasn’t increased its 0.50% figure since 2010. However, that changed
this past week as BOC governor Stephen Poloz pushed the federal interest number
up to 0.75%.
Read
the link attached as Poloz points out many good news items in the economy which
translated into the timing of this decision.
Stephen Poloz
Does
it make a big difference to someone with a fixed rate mortgage on their home?
No
Does
it make a difference to someone with a flexible variable rate mortgage which
they’ve been paying for more than a 1 year? Yes, but not a large difference.
An
amortization calculator will note that if your mortgage rate was 2.9% on a
$300,000 mortgage with 20 years remaining, your monthly payment would be
$1,646.
If
your interest rate suddenly climbed to 3.15%, your monthly payment would be $1,668.
The difference is $22.
Since
prices in the Woodstock area have shifted upward by 25% in the past 12 months,
you are still the tortoise who is way ahead of the hare in this race.
However,
if your interest rate became 4.5%, your monthly commitment becomes $1,891.
Anyone
qualifying for a mortgage currently must qualify for the 5-year fixed rate as a
‘stress test’ on your ability to pay back your borrowing power.
The
actual costs of purchasing a home were increased significantly – in my opinion
– when the CMHC (Canadian Mortgage & Housing Corporation – a federal
government body) insurance fees were increased recently (4.0% premium paid on your
mortgage of 5% down). In other words the purchaser had compiled a stellar
beacon score on their credit record, had a job which paid enough to carry the
mortgage they wanted under any debt service ratio calculator, the buyer had
their total committed debts for car payments and student loans under control,
but they were still forced to purchase an insurance policy to ensure their
lender would never lose a nickel if the buyer was unable to meet their monetary
obligation.
I
believe this increase was due to the idea there is a prediction home values will
decrease slightly in the GTA, Vancouver and elsewhere over the next 2 years. If
you paid $900,000 for a home and lost it to you bank, would it be worth only
$850,000 (or less) in 2018?
CMHC fees assist home
buyers in an ability to purchase a home with a high-ratio mortgage and
sometimes as little as 5% down payment, but the advantage is strictly to the
banks (Credit unions and other established lenders).
INTEREST RATES
The Poloz press
conference talked about “stronger than expected growth” in the economy.
His optimism included
signs that our national picture for manufacturing is very strong as: “Growth is broadening across industries and
regions and therefore becoming more sustainable. As the adjustment to lower oil prices is largely
complete, both the goods and services sectors are expanding.”
Twice in 2015 interest rates were lowered at a time
when crude oil prices had dropped significantly and the economy required a
boost.
The overall picture is now much better.
“The economy can handle very well this move we
have today and of course you need to preface that with an acknowledgment that
of course interest rates are still very low,” Poloz told a news conference in
Ottawa.
In my opinion, the best
news about the increase to 0.75 is that almost immediately the Canadian dollar
started to rise. You don’t need a degree from Western’s Ivey Business school to
know that our dollar must be higher than 75 cents versus the U.S. buck for overall
business success on our side of the border. I’m guessing between 84 – 88 is a
target, but again I’m not a financial analyst, but rather an innocent bystander
of the ‘bus rapid transit system’ we call an economy.
Without an interest
rate increase for borrowing, one news item noted that lending institutions were
feeling pressure about possibly lowering interest rates paid out on savings
accounts to below 0. Could you imagine having a banking system where your money
would shrink and not accrue if kept quietly under a bank’s mattress? I realize
that versus inflation, that is already the scenario we live by.
The next time the BOC will
consider any further modifications to the so-called overnight interest rate is
Sept. 6.
One economist with the
Bank Of Montreal suggests there could be another increase this year, but not
until October.
^ Link To New Stories Above ^
()()()()()()
Mark Schadenberg, Sales
Representative
Senior Real Estate Specialist
(SRES designation)
Royal LePage Triland Realty
Independently Owned & Operated, Brokerage
757 Dundas St, Woodstock
(519) 537-1553, cell or text
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