Bank of Canada July 2018 Announcement Brings Canadian Housing Interest Rates to 1.5%
The Bank of Canada interest rate increases began in July of 2017, going from 0.5% to 0.75%. From there, they went to 1% in September of 2018, and 1.25% in January of 2018. The July 11, 2018 announcement is the most recent increase.
Higher interest rates mean that Canadians will have to pay more on outstanding, unsecured debts, including credit cards, unsecured lines of credit, and variable-rate mortgages.
This could also affect potential homeowners as mortgage lenders have to stress test mortgages against current interest rates following the introduction of B-20 guidelines in January of 2018.
Lenders are encouraged to look at the gross debt service ratio (GDS), meaning the percentage of a person’s household-related debt, and the total debt service ratio (TDS), meaning the percentage of a person’s total debt, rather than using only the loan-to-value ratio of a potential property purchase.
The Bank of Canada (BOC) has been hinting for months that more interest rate hikes were on the horizon, and this month it came to fruition.
The BOC referenced several reasons for the increase in its statement, including the Canadian housing market.
“Canada’s economy continues to operate close to its capacity and the composition of growth is shifting,” the BOC stated.
In past years, the Canadian economy depended on lower interest rates to stay afloat — household spending and the Canadian real estate market were both big economic drivers. But recently that makeup has changed and those items are not as critical. Instead, exports, business investments, and the like are becoming the economic strongholds.
As a result, the BOC is now trying to curb the high level of Canadian household debt through higher interest rates. They also cited recent data “suggesting housing markets are beginning to stabilize following a weak start to 2018” .
More interest rate increases are expected to come but will take a gradual approach. The BOC will be monitoring incoming data, the impact of higher interest rates, capacity and wage pressures, and trade actions.
According to Bloomberg, investors are anticipating additional hikes every six months or so until the benchmark rate settles around 2 or 2.25% by the end of 2019.
The next BOC announcement is scheduled for September 5, 2018.
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