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2017 is Here and Interest Rates Have No Where to Go But…

While 2015 was a fairly active year as far as the Bank of Canada adjusting interest rates, 2016 has remained largely uneventful. Canada began 2016 with a low interest rate of 0.5%, which has remained the status quo throughout the entire year.

Economists and the Canadian government alike have continued to voice concerns that Canada could be at risk of a housing bubble – a bubble that would likely only burst should interest rates go up. It is the very low rates that have made it so affordable for Canadians to buy real estate in Canada, and that has helped to fuel a continually growing real estate market.

But what would happen should Canadian homeowners face mortgage renewals at 5% and 6% interest? This is precisely why regulators like OSFI are asking some lenders to perform stress tests, which would show them what a substantial decline in their portfolio would look like. In addition, the Canadian government has announced new rules that could perhaps make it more difficult for non-bank lenders to compete.

The new rules will mean that lenders who insure their mortgages using portfolio insurance or other low loan to value insurance products will have to meet far stricter criteria, which up until now only applied to high ratio insured lenders like banks. There was an excellent article in the Globe and Mail that outlined the changes and what they mean to you (the lender). Some have speculated that these changes could result in interest rates going up in 2017 – check it out here: http://globalnews.ca/news/2990237/canadian-mortgage-rates-could-rise-under-ottawas-new-rules/.

Writers at some national publications including the Huffington Post have suggested that Canadian rates could go up because Canadian banks are taking larger risks compared to our U.S. counterparts (http://www.huffingtonpost.ca/2016/05/10/interest-rates-canada-banks-risky_n_9890600.html).

It has been widely reported that Canadian households are carrying record debt loads when compared to other similar nations, and that rising interest rates could crush Canadian families. A recent poll highlighted just that – that Canadians fear that, should interest rates go up, they are unsure how they will continue to maintain their mortgage payments http://www.news1130.com/2016/10/16/many-concerned-making-mortgage-payments-interest-rates-rise-poll/.

At 0.5%, interest rates don’t have much further to go in a downward direction – and it is doubtful that the Bank of Canada will maintain the status quo. With that said, some economists are predicting that slow economic growth will in fact lead to further rate cuts – see here for more on that: http://business.financialpost.com/news/economy/slow-growth-could-lead-to-rate-cut-in-canada-economists-say.

 

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