Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Bank of Canada, as usual, once more decided not to move its overnight target rate. The bank, Canadian central bank that is, controls overnight lending or short-term lending between Canadian financial institutions using target overnight rate.

A low overnight target rate ensures that the financial institutions are not paying the market-rate when they need money to balance their books. It is more complicated than that simple statement but BoC does a favor to the banks by keeping the interbank lending rate within the overnight target rates.

The bank is aware that the total inflation has moved up to 2% target. The bank acknowledged that the inflation moved ahead of its anticipated time. Again, the usual culprit is high energy price.

This time the bank also pointed out towards another new entrant in the market. The technical term it is defined as exchange rate pass-through. In simple terms, it means, that we are paying more for the goods in the international market than we used to pay before. Weaker Canadian dollar is the cause of this price inflation.

Surprisingly, even now, the bank is pointing towards market indications like declining long-term bond yield etc. to indirectly conclude that the long-term rates will stay low. Although the bank did not directly acknowledge that it also expects the rates to stay low and far future but it admitted that there are indications.

Finally, after looking at all factors in closing household debt, the bank decided that it is not time yet to move away from overnight 1%.

Apart from Bank of Canada’s rate there is another very important rate tied to BoC’s decision. That is prime lending rate. That is set by the major Canadian banks at present prime is at 2% above overnight lending rate. It is not necessarily to be the same across all the banks, but in reality it is the same for all the banks.

Prime rate has a pseudo tie-up with Canadian central banks rate. It appears that the 2% premium is a constant value. But it is not. If Canadian lender of last resort starts to tighten up some other aspects of our financial market then the private lenders may decide to beef up the 2% premium. It has happened in the past.

Right now, this is actually a good news for mortgage holders. It is not at all a good news for the would-be homebuyers. If you’re planning to buy a home then it is a good time that he will reschedule your plan.