Mortgage expert warns U.S. Fed will cause rate increases in Canada

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U.S. Federal Reserve chair Janet Yellen has strongly signalled that the first federal funds rate hike of 2017 will be announced at the two-day policy meeting next week on the back of a strengthening U.S. economy and waning global risk factors.
With two more increases said to be in the cards this year, one Canadian mortgage expert says it’s time to lock in a rate before things get more expensive.
James Laird, co-founder of interest rate-comparison website RateHub and president of mortgage broker CanWise Financial, says he has seen five-year fixed rates tick up about half a per cent since the fall. He’s calling for rates to continue pushing higher through 2017.
“If you’re considering refinancing or have an upcoming renewal, you should absolutely act sooner rather than later,” he told CTV News.
As the saying goes, when the U.S. sneezes, Canada gets a cold. U.S. interest rates and the impact on Canadian mortgages are no exception.
Fixed rate mortgages, the most common in Canada, are tied to long-term Canadian bond prices, which are in turn tied to U.S. bond prices. Banks sell bonds to raise money to lend to mortgage holders and other borrowers.
When the U.S. Federal Reserve raises rates, bond prices typically fall.
For example: If current interest rates were to rise, giving newly issued bonds a yield of 10 per cent, older issues yielding 5 per cent would not be in demand until their price falls to match the same return generated by the new prevailing interest rate.
As bond prices fall, banks tighten their lending, and mortgage rates rise.
Most Federal Reserve watchers believe improving U.S. economic data, a more stable global economy, and a booming U.S. stock market could justify a series of Fed interest rates increase this year.
“The party line has been three rate hikes, and some people on the street are saying it could even be four,” Laird said.
While Janet Yellen appears set to continue pressing ahead in lifting U.S. interest rates from historic lows, her counterpart at the Bank of Canada, Stephen Poloz, has opted to stay the course with Canada’s monetary policy since July 2015.
The Bank of Canada held its benchmark interest rate steady at 0.5 per cent again on March 1, citing “significant uncertainties” weighing on the outlook for the economy.
In essence, Canadians may soon be asked to pay more for their mortgages while the Bank of Canada seeks to keep borrowing historically cheap.
Laird says if five-year fixed rates were to rise from 2.5 per cent to 3 per cent on a $400,000 mortgage, for example, that would add an extra $100 to each monthly payment or $1,200 annually.
“Mortgage rates should only be going up in 2017,” he said.
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