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Bank of Canada March 2011 Rate Holds

As I have been hoping for a while, the government learned from their series of rate increases last year and held solid to the current rate. The benchmark rate is remaining at one percent, even with the strength of the Canadian economy showing what can only be termed, very optimistic growth.

It was similar growth last year that was used as part of the rationale to increase rates in late spring of 2010, and hopefully we don’t see a similar pattern this year. In my opinion, the rate increases last year were at a most inopportune time. Just as the economy was starting to gain some momentum, the wind was literally taken from the sails by the rate increase.

Many home buyers had rushed in to take advantage of the low rates which created a vacuum after the boom. A similar situation could again be the case unless the government starts providing better indicators of their intentions in advance.

Simply put, if people start to fear rates will go up again, we will see another spring rush and then a flat summer. If reasonable expectations are laid out and the public gets informed that there is a potential for a small rate increase in the summer, it may help reduce a panic induced rush of people buying.

There is too much fear and misinformation out there. People simply do not realize that rates will not jump into double digit territory any time soon. History showed how ramping up the rates caused massive economic problems for years. Now with more of a global economy it becomes so much easier for companies to move operations elsewhere or concentrate business in areas that are interested in developing their economies. If a country like Canada were to raise rates like crazy, it would push many of our businesses away further deteriorating our economy.

On the other hand, a country like the US which is printing money like crazy may have to rein in their pending inflation with significant rate hikes. This could potentially make Canada a haven for new business operations for them. A lot of this is speculation, but wouldn’t it be nice?

Investor Perspective

What does the rate holding steady mean to an investor? It will depend on what types of mortgages you have or are intending to acquire. Variable rates mortgages will hold steady and continue to be a great option. Variable rates are insanely low still and can help really increase cash flow for an investor due to the low rates.

Additionally the low rates also allow more of the principal to be paid down on the mortgage helping to put the investor in a stronger position if values were to drop. The caveat, you need to be sure you can support a 2 or 3% rate hike if you have to lock the rate in at a later date. This likely won’t be necessary, but if you plan for it and it doesn’t occur, it just becomes more profits.

If you have a fixed rate, nothing changes for you, unless you are getting a new mortgage or refinancing. Then you have to consider whether rates will go up later in the year; just remember if they do, it won’t be a significant amount, perhaps a quarter point. This should make for a near negligible difference on the investment.

If however, that turns the prospect of purchasing an investment property into a questionable investment, it was never worth it in the first place. If your investment is make or break due to a .25% difference, it is simply too risky to start with.

Longer term, well rates will inevitably have to go up. Just remember it is extremely unlikely they will double in the near future, remember that investment properties worked spectacularly just five and six years ago at often double the rate and remember that if you plan accordingly and build up reserves now you will just float harmlessly through problems later.