Bank of Canada Rate Increase

The Bank of Canada raised its benchmark lending rate by 25 basis points to 1% in mid-September. What does that mean to the average home owner in Canada?

Variable rate mortgages that are directly effected by bank rate changes are being chipped away by this steadily increasing interest rate environment. The Bank of Canada has increased it's lending rate three times over the past five months. Late in 2008 the mortgage fiasco in the USA dramatically effected our market in Canada, Alberta and Calgary bringing sales to a standstill. Sales in Calgary were the lowest we have seen in over a decade following the huge slide in the American housing market. It is important to note that the Canadian mortgage regulations are far different than our neighbours to the south, however, the perceived potential downfall in our market pulled many potential buyers from the market taking the "wait and see" approach. The Bank of Canada reacted quickly reducing its lending rate to a mere quarter percent. This emergency measure was brought in to increase affordability and - most specifically - to kibosh a potential disaster in our real estate sector. These measures contributed to the fact that values in our city and across the country stayed relatively constant after the US market plummeted in value at the end of 2008 and early 2009. It was only a matter of time before these emergency rates needed to be reevaluated and a more realistic lending rate be implemented.

Those of us that have opted to save interest charges by utilizing the variable rate mortgage or a Home Line of Credit (HELOC) are being effected most by these increases and are now paying more for making those choices. Interestingly enough, the current economic instability and unpredictable bond market have created a small window of opportunity to lock in historically low fixed rates.

The cost of borrowing certainly effects the real estate market and we have seen our market slow over the past few months. Many factors have contributed to this trend, including the higher cost of borrowing and more stringent lending guidelines. I am not sure this is necessarily a bad thing. At the peak of our dramatic climb from 2006 to mid 2007 we saw home prices double. Was that sustainable? Absolutely not, and many home buyers over-extended themselves out of necessity during this time. We are still seeing the effects of this climb and subsequent fall in home values. It is anybodies guess as to how long we will see this decline in value... we are in the midst of a "market adjustment" and have been for the past three years.

There are many opportunities in the market today. Interest rates are still at historical lows and inventory is quite high giving buyers a great opportunity to get into the market, to move up, or to downsize. Your home is you biggest financial asset and a real estate investment, regardless of the price category, is still a great long-term financial strategy.