Variable Rate pauses in 2006
The latest rate-hold bucks the recent trend of prime rate increases.
Posted August 2006
Is it time to think about a variable-rate mortgage?
Two weeks ago, the Bank of Canada (BoC) bucked the trend it had set during the first half of this year, and left the rate unchanged. Before this announcement, there had been seven consecutive increases in the overnight rate. The most recent increase took the rate to 4.25%, which took effect in late May.
The BoC felt that the current rate is sufficient to hold inflation within the annual target range of 2%, as the outlook for economic growth and inflation has not changed materially from the Bank's last update in April 2006.
The last increase sent the prime rate to 6.00%. In that analysis, the Bank judged that the Canadian economy would continue to perform slightly above its production capacity. Normally, this would signal the need for more rate tightening in order to hold inflation in check, but the BoC anticipated that mid-term weakness in U.S. consumer consumption and further depreciation of the U.S. dollar would exert enough pressure to keep inflation stable. This forecast, together with a lag effect from a higher Canadian dollar, lead the bank to hold firm on its overnight rate.
What does this mean for the Canadian mortgage market?
Have we reached the end of increases in the prime rate for now? Well, of course, no one is totally sure.
We can probably conclude that the recent decision and commentary from the BoC may renew consumer demand for variable-rate mortgage products.
When the prime rate reached 6.00%, the spread between 5-year fixed-rate mortgages and variable-rate mortgages reached its lowest point in more than five years. With all of the prime rate increases in the first-half of this year, the variable rate — which normally offers higher interest savings — didn't seem as palatable, and many of our clients chose the security of a fixed rate over the uncertainty of a variable rate.
Now, with the BoC holding steady on the overnight rate and with most Canadian investment dealers predicting no further bank rate increases for the remainder of this year, consumer preference may shift back to the prime-based, variable-rate mortgage products.
If you think a variable-rate mortgage is right for you, don't look any further than our prime minus 0.95% mortgage.