Why Canadians should be careful borrowing when rates are low
The Bank of Canada has an interest rate announcement on Wednesday and it is widely believed the bank will hold its overnight rate at 0.25 per cent.
I think it is interesting to note that not too long ago there was chatter we could see a "micro cut" that would take rates lower in an effort to stimulate the economy and avoid having the Canadian dollar rise even higher. However, given blistering hot housing markets, the odds of that happening are almost nil since the central bank would be loathe to toss more fuel on surging home prices.
As BNN Bloomberg has previously reported: the economy doesn't need more stimulus - fiscal or monetary. It needs more COVID vaccinations. Indeed, given the current number of COVID-19 cases, the re-opening of the economy will be bumpy at best.
Bank of Canada Governor Tiff Macklem has telegraphed very clearly that rates will remain low for an extended period of time; most recently, the bank has suggested it’ll be on hold until 2023. Canadians paid attention to that: a low interest rate environment, little housing supply and a desire for many to relocate out of urban centres has provided maybe too much support for real estate markets.
You might think it can't last - but it could.
Five-year fixed mortgage rates have been inching up, but they are still near historically low levels and certainly have not been a deterrent or barrier to entry for first-time homebuyers.
However, many Canadians should proceed with caution if they’re tempted to take advantage of cheap money.
Rates may be low, but the job market is still precarious and loan delinquencies are revealing that some borrowers may have already taken on more debt than they can handle.
The reality is our economy isn't going to thrive until vaccines take hold. Yet there are pockets showing signs of life and as soon as the Bank of Canada can normalize rates and start to move them higher I believe it will.
In the meantime, we are at an inflection point that isn't necessarily a good one.
It has been estimated by BMO that Canadians tucked away $200 billion in excess savings last year. That clearly indicates those who can afford to spend have chosen not to. Meanwhile, those who can't afford to spend continue to do so -- and it won't be long until creditors come calling.