For the best part of 2011, speculation on the future of Canadian interest rates were dominated by predictions of rate hikes to come before the end of 2011. Many of the banks’ own economists were citing increasing household debt, decreasing affordability in parts of the Canadian housing market and a need to eradicate inflationary fears as contributory factors which would fuel the inevitable rise.  However, the continued stagnation of the US economy, further lamented by its S&P downgrade and increasingly frequent mutterings of the, dare not say it aloud, “double dip” have represented somewhat of a game changer for all concerned. With the US Federal Reserve now signalling its intent to keep its key interest rate near zero through to the middle of 2013 and inflationary worries subsiding on home shores, the Bank of Canada (BoC) looks increasingly likely to keep interest rates fixed at current levels until at least the second quarter of 2012.

While this should sound like music to the ears, or perhaps read like Wordsworth to the eyes, for our variable rate customers, it does present somewhat of an unforeseen predicament for the mortgage lenders. For months the banks have been offering foreboding warnings of increasingly tight profit margins on their variable rate mortgages VRMs. These banks have been offering enticingly low VRMs, not as a testament to their own benevolence but with the duality of purpose of firstly building up a customer base which can then be cross-sold much higher interest bearing products (e.g. credit cards, lines of credit) and then, it is hoped, reaping the rewards when, faced with rate increases by the BoC, these customers convert to the much more profitable fixed rate mortgages. The likelihood of this happening any time soon seems increasingly slim as Canadians flock to VRMs under the assumption rates will remain low for the foreseeable future.

With the banks faced with the increased funding costs brought on by the recent geopolitical turmoil and the tendency of banks to adjust their variable rates higher as they near the end of their fiscal year, to help inflate their profits and meet targets, it is hardly surprising that several of the lenders have already moved to cut the discount rates offered on the variable rate products. Royal Bank of Canada raised its rates on its five-year closed VRM by 0.20 percentage points last Tuesday. BMO, TD and Scotia were all to follow suit later in the week.

If you are looking at purchasing a home in the near future and were considering a VRM we implore you to contact MorCan Direct immediately (416-214-9000) and speak to one of our experienced brokers about locking yourself into a low rate variable rate mortgage today. The good news is that for those who are still unsure of the merits of a variable rate mortgage and wish to opt for the increased security of a fixed rate mortgage, rates on these products have come down sharply in the last month and represent a fine alternative. With the markets experiencing such volatility and uncertainty lately, it is hard to remember a time (unless you can remember all the way back to 2008 of course) when the advice of experienced professionals was more keenly sought. Shrugging your shoulders now will mean reaching into your pockets later. Don’t let yourself get caught in this purgatorial state of uncertainty! Contact MorCan Direct today for our sound, unbiased mortgage advice.

Marcus Tzaferis