The Bank of Canada (BoC) has today decided to place a hold on any change in its Key Rate, and is holding at 4.5% (Prime rate of interest at major financial institution’s 6.7%) for the first time in nine announcements (March 2022). This is as opposed to the US Federal Reserve which has indicated clearly that it will be continuing to raise its rate several times more this year. This is a good point in time to understand a big difference between the US and Canadian economies.
In Canada, mortgage terms are different than mortgage amortization, in that you can procure a five-year mortgage term whilst amortizing it over 20, 25, or 30 years. Whereas, in the US, term and amortization are synonymous. Therefore, in the US; consumers that tucked away their mortgage needs before March of 2022 are safe and sound for the long term if they went into a fixed rate 20 or 30-year mortgage. In Canada, there is a 5-year horizon for most consumers and businesses with a mortgage. There are longer-term mortgages in Canada but the 5-year term is by far the most popular.
The other difference between the Canadian and US mortgage markets is that Canadian mortgages typically have penalty clauses whereas in the US they do not. In times of falling rates US mortgage holders are motivated to refinance whereas in Canada not so because of the onerous penalties that will apply to do so.
We believe that the BoC is taking this into consideration and is willing to sit on the sidelines for now with regard to any further rate changes. If they were as hawkish as the US Fed, there could be a serious impairment to the housing market and values. Many consumers are near the end of their mortgage term or mid-way through. When renewal time comes, they will be very surprised with the rate offerings compared to the existing rate that they are coming out of.
Another immediate impact coming from the BoC’s decision today is a weaker Canadian dollar, which should help Canadian exporters and therefore buoy the economy.
If you are a new or current ongoing client of Mortgage Logic, we would be happy to review your mortgage and finances with you to determine your best strategy forward, free at no cost.