MORTGAGE PAYMENTS
PRICE: $350,000 ($35,000 down payment) MORTGAGE TERM: 25 years
Interest rate (five-year variable) 3%
4% 5%
Source: Desjardins
Will rates go up? “Why would interest rates increase?” Gordon asks. “Under what circumstances would this happen? Rates increase when the economy is strong, inflation is close to the Bank of Cana-
da’s target and the job market is doing well. Let’s not forget that all these factors are good news.” Alex Koustas, an economist at BMO Capital Markets, agrees.
“We would only see a more marked increase than anticipated if the economy were progressing more quickly than expected; this would mean higher salaries, less unemployment and a better GDP. These positive effects would offset the negative impacts of a rate hike.” It is worth noting, however, that the Bank of Canada mostly controls short-term interest rates, not the overall economy. In 2013, when the US Federal Reserve announced it was tapering off its quan- titative easing program of printing money and buying bonds, the yield on US bonds increased, as did the yield on Canadian bonds, which, historically, closely reflects that of US bonds. In addition, these US bonds, which mature over five years, are used as a benchmark for many mortgage loans. As a result, interest rates can rise due to external factors, despite the will of the Bank of Canada. According to Rabidoux, “Over a three-month period in 2013, mortgage rates rose to 3.8% from 2.8% for
Monthly payment $1,530
$1,703 $1,886
five-year, fixed-rate loans. This was a trying time for mortgage brokers and real estate agents. Many Canadians renegotiated their mortgages for the long term out of fear that rates would keep rising.” If a 1% increase causes panic in the mortgage market, he adds, this says a lot about how sensitive Canadians are to interest rates. That being said, an interest rate increase would still have its
advantages, especially for pension plans, which invest consider- ably in bonds, and for retirees. In general, Canadians do not save enough for retirement or unexpected expenses. Higher interest rates would encourage saving and deter credit purchases. In addition, a growing number of Canadians would plan
better to allow for some leeway in case rates do go up, Jara adds. “Few consumers are taking such precautions right now, which makes many of them very vulnerable. A rate increase would make Canadians more mindful of the possibility of further rate increases; we are lying to ourselves when we believe interest rates will remain the same.”
DAVID DESCÔTEAUX is a Montreal-based business columnist
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MARCH 2015 | CPA MAGAZINE | 43
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