To the surprise of many economists and analysts the Bank of Canada (BoC) has decided to increase its key lending rate for the second time in 2 months by another 0.25% on September 6^th 2017.  This brings its target overnight rate to 1% and the variable mortgage prime rate to 3.20% for most banks.

The first thing to consider is why this is happening.  It seems that the BoC is modifying its global monetary policy from one that was heavily based on inflation data to a more global perspective.  Instead of basing their decisions primarily on inflation data as a core measure of the economy the Bank has decided to consider other economic data such as GDP, employment data, business investment, exports, currency and global factors such as commodities pricing and geopolitical risk.  At this point it is unclear which factors will weigh more heavily on decisions moving forward but we can expect a more global approach in the future.

What will happen now?  Considering the factors mentioned above it is likely that the BoC may increase again before the end of 2017.  The Canadian economy in general seems to be showing strength and our current overnight rate of 1% is still 0.25% below that of the United States.  Considering Canada’s economic performance and the revised monetary policy approach of the BoC it is hard to justify maintaining the overnight rate under that of our southern neighbour. However, it is important to note that the BoC has clearly stated that it is concerned for the real estate market across Canada and Canadian indebtedness in general as well as geopolitical risk.  It has clearly stated that future monetary policy decisions are not predetermined and will be guided by the factors mentioned above.  Events such as Brexit, NAFTA renegotiations and political uncertainty on our southern border may stop or reverse certain trends.

If you are currently in a variable rate mortgage, here is our recommendation:

• Please contact the lender and request what would your fixed rate be if you converted your variable mortgage to a fixed mortgage from now until the end of your term.
• If the fixed rate offered is below the 3% mark, it is worth considering to convert your mortgage to a fixed rate.
• If the fixed rate offered is above 3%, then it is a case per case analysis that requires further discussion and consideration.

Important: Variable mortgage rates are not only advantageous because they are generally lower than fixed rates.  Penalty conditions as well as other important factors also make variable rates interesting.  When making this choice consider all the advantages you will lose by converting to a fixed rate and DO NOT base your decision solely on the interest rate.

For further guidance please contact our team, we are available to provide advice and perspective for you to make an informed decision.