Once again the US has managed to avoid a fiscal crisis although the gamesmanship did result in a shutdown of the government. And once again it looks like the deal that was reached does not provide a long term solution. So how do these on-going crisis impact on interest rates in Canada?
It is not likely that the Bank of Canada will be able to increase interest rates in Canada until the US economy recovers to the point where inflation starts to go up past 2% and growth passes the three percent range on an annual basis. Currently this is not the case in either the US or Canada. And each time the US has one of their fiscal crisis there economy slows a little.
Previously most analysts were predicting that the Bank of Canada would not be raising interest rates until 2015. Recently some analysts have been predicting that with the current state of the North American economies it is likely that the Bank of Canada will not be increasing rates until 2016.
What does all this mean for Canadian mortgages?
We have seen the rate on the fixed term mortgages increase in the second half of this year based on the increase in the Canadian bond rates. In the past two to three weeks the bond rates have dropped a little so it does not look like the fixed term rates will increase any further this year.
At the same time as interest rates have gone up on the five year fixed term mortgages (currently in the 3.59% range) we have seen the discount being offered on the variable rate mortgages increase to the prime minus .4% to prime minus .5% range. Currently variable rate mortgages are available for between 2.5% and 2.6%.
If you consider the spread between the variable and fixed term mortgages and the possibility that rates might not go up until 2016 it makes sense to at least look to see if a variable rate mortgage is right for you. I have a tool that will help you assess if the variable rate mortgage makes sense for you even after we factor in a possible increase in interest rate. If you want to look at this further please let me know.