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August 24, 2016 nkad3

How Current Interest Rates Are Determined and Where They’re Headed

When it comes to current interest rates for mortgages, it is important to understand how they come to be and what influential factors are considered when offering those rates. Since the recent market crash in the United States back in 2008, our current interest rates here in Canada have been at an all-time low. In fact, they have remained historically low for almost a decade now.

The Bank of Canada is our central bank and It is the responsibility of the Bank of Canada to insure the stability and growth of our economy. As such, the Bank of Canada sets and controls the key interest rate which directly affects the rate of borrowing in the country. In other words, the banks that we all borrow from, base their rates on the Bank of Canada’s key interest rates.

It is interesting to note that although the Bank of Canada raises and drops the key interest rates, our banks do not necessarily follow suit by the same measure. For example, if the Bank of Canada drops the key interest rate by 25 bps (or 0.25%), the major banks may only drop the mortgage rates by 15 bps (or 0.15%).

The reason that current interest rates have been so low, is to promote economic growth and ensure the economic stability until the nations capacity to endure higher rates is demonstrated. The increase of interest rates is a certainty although the “when” is uncertain. In fact, a major question that many are asking is “when are interest rates going up?”. One of the major problems we fact as a nation is that amount of debt that Canadians are accumulating based on low interest rates and to the extent to which they are borrowing. Many Canadians are borrowing to their necks in debt and are doing so to the maximum allowed based on their affordability. The concern is that if interest rates were to increase by even 1%, many Canadians would not be able to afford their payments, resulting in default.  Therefore, the Bank of Canada needs to approach this issue with great care, without shocking the economy should enough Canadian’s default on payments they can no longer afford.

Of course, this economic responsibility also falls on each and everyone of us when we decide to borrow money. It worth stating that just because current interest rates are low and banks are willing to lend you money, doesn’t mean that you should borrow it. Each borrow should assess their own repayment capability which would involve an understanding of their personal circumstances surrounding income, lifestyle, responsibilities, etc. a word of advice would be to avoid borrowing to the maximum because by definition, the maximum is the limit to what you can borrow. When rates go up, you will be beyond your maximum and potentially harming yourself financially if your personal circumstances, especially income, remain unchanged or worsen…

 

If you would like to discuss current interest rates for your Mortgage or have any questions surrounding this topic, please contact us today!