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All variable rate mortgages and lines of credit are affected by changes in monetary policy as dictated by the BoC. Generally, when the BoC decides to adjust (or leave unchanged) its “overnight lending rate”, chartered banks and other financial institutions react by moving their prime rate accordingly.

What Happened?

Today, as widely expected, the BoC again announced that it is leaving its target overnight interest rate at 1%. Following this news, chartered banks and other financial institutions are expected to leave their prime lending rate at 3%.

In a release statement, the BoC seemed principally concerned that “…The persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy”. Many economists were quick to point out that this is a small but significant change from their last release statement. At that time, inflation (and the subsequent pressure to raise the overnight lending rate) seemed to be the primary concern. Clearly, the BoC is not interested in changing course until the long term effects of a stronger currency are more apparent.

How Does This Affect You?

Those in a variable rate should be very happy with today’s announcement. If there was any surprise in today’s announcement, it seems the BoC is backing away from rate increases in the short term. While every household budget is different, I continue to believe variable rates are still a good place to be in the short-to-medium term, even as fixed rates have continued to nudge up over the last 6 months.

Today’s Average Variable Rate Mortgages:  Prime less 0.75% for a 5 year term (currently equal to 2.25%).

Variable rate discounts (that is, the reduction below prime) have fallen slightly over the past few months.  It’s my belief that we may see slight reductions to these rates in the year ahead, but this shouldn’t be seen as a reason to delay financing decisions, given the potential for short term savings.

Today’s Best “No Commitment” 120 Day Rate-Hold:  5 Year Fixed @ 4.34% or a 4 Year Fixed @ 3.79% (Other rate-hold terms available on request, as are lower 5-year rates subject to an application).

If you are concerned that fixed rates have risen and may continue to rise, now may be a good time to call me to review your risk tolerance and figure out your plan for higher rates down the road. Further to this, securing either of the above rates for the next 4 months is as easy as letting me know you’d like to. No obligation, no application, and no credit check necessary.

Outlook and Opinion:

The wording today suggests that the BoC is not convinced what the long-term implications will be if the Canadian dollar remains elevated at $1.04 USD. A strong Canadian dollar also tends to keep inflation in check, so the voices suggesting an immediate rate hike are becoming muffled. Economist and traders are generally in agreement that prime rate won’t be on the move until this July at the earliest, although some now think this move may come even later. As always, these expectations can quickly change either way if oil prices, inflation, food costs, unemployment or foreign deficits bite into Canadian economic growth.

Providing you have the risk tolerance and flexibility in your budget to withstand higher payments, variable rates will likely provide a larger interest savings over the next five years. It is true that over the next several years prime may go up in a way that would make locking into a fixed rate a better option; there’s also a strong chance it will not.

The next Bank of Canada meeting and decision on the overnight rate is May 31st, 2011.

Peter McKinnon

peter@peterlmckinnon.com

Last changed: Apr 13 2011 at 4:29 PM