Bank of Canada Warning: The Bank of Canada is sounding the alarm on a concerning issue within the mortgage market variable rate mortgages with fixed payments. Senior Deputy Governor Carolyn Rogers expressed her apprehensions and suggested that the industry needs to take a closer look at this product.
In Canada, many variable rate mortgages come with fixed payments. This means that when interest rates rise, a larger chunk of the payment is allocated to covering interest, rather than reducing the principal. Consequently, this leads to an extension of the amortization period, and this has become a matter of worry.
The Bank of Canada’s swift series of interest rate hikes in recent times has pushed some mortgages into negative amortization. This occurs when the interest on a loan exceeds the fixed payment on the principal, causing borrowers to effectively increase their loan balance.
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Rogers expressed her concerns about this situation, emphasizing that having a substantial portfolio of negative amortizing mortgages is not in the best interest of either the banks or the mortgage holders.
On the topic of monetary policy, Rogers mentioned that a rate hike is still on the table until they are genuinely confident that they are making progress in lowering core inflation to the target level.
Recent inflation data for September did show some improvement in the central bank’s preferred measures of underlying price pressures. However, these figures still remain significantly above the 2% inflation target. As a result, money markets are now beginning to factor in the possibility of a rate cut by June, as it appears further tightening by the Bank of Canada is increasingly unlikely.
Our Reader’s Queries
Is the Bank of Canada expected to hold rates?
As anticipated, the Bank of Canada has maintained its benchmark interest rate at five per cent. Over the past year, the bank has increased its trendsetting rate ten times to curb inflation. However, it has hinted that it may be approaching the end of this cycle. This decision to keep the rate steady comes as no surprise.
Will Bank of Canada lower interest rates in 2024?
In an effort to control inflation, the BoC has increased rates 10 times since early 2022. However, the bank’s recent tone suggests that the hiking cycle may be coming to an end. With a decrease in GDP and an increase in the jobless rate, economists predict that the bank will begin to lower its rate in 2024.
What is happening with Canadian mortgage rates?
In 2023, the BoC Policy Rate saw a 75 basis point increase (1 basis point equals 0.01%). According to predictions from Canada’s Big 6 Banks, interest rates are expected to start decreasing by mid-2024, with a decrease of 25-50 basis points. By the end of the year, the decrease is expected to be between 100-175 basis points.
What is the projected interest rate for 2024?
According to Bankrate’s chief financial analyst, Greg McBride, mortgage rates are expected to gradually decrease throughout the year, with a projected rate of 5.75 percent by the end of 2024. McBride predicts that rates will mostly remain in the 6s for the majority of the year, with any movement below 6 percent occurring in the latter half of the year.