Whats going on with Mortgage Interest Rates in Canada?

By Benjamin Bach, the Wealth Team on June 8, 2010 in Featured Articles, Real Estate Investment

Interest Rates and Mortgage terms have been in the news the last few years – first, rates were at a historical low, and now the talk is that they are heading up.

Add to that the waves CMHC made in the area of residential investment by increasing the required downpayment for small residential properties 400% (yes… they really did quadruple the required downpayments for many types of small rental properties! See: New Investment Property CMHC Mortgage Rules & downpayment options in Canada)

I asked my friend Wojciech Pianka, a mortgage broker with Mortgage Alliance (and a real estate investor too) to provide some commentary for me, and I want to share what he told me with you:

Mortgage Update for week of June 6^th, 2010

The Bank of Canada as predicted raised its overnight lending rate a quarter point to .50%. This was followed by other major banks raising their variable rate mortgages and other prime rate tied products. With the Canadian economy recovering and growing faster than predicted, the Bank of Canada had to act to curb inflation and keep household debt down.

Earlier in the year, it was expected that the overnight rate would keep increasing; however the European Union’s financial stability (editors note… see: From Greece with Love for how the European Debt Crisis is directly affecting some investment real estate sales in Kitchener Waterloo -BB) is concerning world markets.

Now as interest rates rise, we can expect more prime minus mortgages as banks compete to attract new business and grow their portfolios.

In the next few months we can expect a very timid outlook. Depending on the European fallout, the BoC may continue rising rates slowly. This is actually good for the Canadian housing market.

While prices may drop as less buyers qualify for loans, the market will stabilize. It will also allow people who are having hard time making payments, due to rate increases time to sell without foreclosure.

As more owners sell, expect real estate investors to start buying investment property.

Something to look forward to: Historically, each time the BoC has raised rates before the United States Federal Reserve, they have had to lower rates again down the road.