What are these Bank of Canada interest rate updates all about?

Ever wonder what these interest rate announcements are all about? 

Just to recap, on September 5, the Bank of Canada announced that it is keeping its benchmark interest rate steady at 1.5%. 

But what does this number mean? How does it impact your day-to-day life and the economy? 

I’ll explain how it affects debt, the banks and the economy.

Key terms and facts

Before I dive into the details, it’s important to understand some key definitions. The media uses different terms when they talk about interest rates, which can be confusing.

Bank of Canada 
As Canada’s central bank, it is the big boss of the economy. Their goal is to preserve the value of money by keeping inflation between one and three percent.

Target for the Overnight Rate (also known as the “policy interest rate”)
The Target for the Overnight Rate is the main tool used by the Bank of Canada to conduct monetary policy to try and keep inflation low and stable. A low and stable rate helps grow the economy steadily and creates jobs. The media often refers to this tool as “interest rate” in articles.

Whenever the Bank of Canada changes the policy interest rate, it affects other interest rates like mortgages and consumer loans.  

The Bank has eight fixed dates every year where they announce whether or not it will change the rate. The next announcement will be on October 24, 2018.

Overnight market
Before I get into how changing interest rates affect you, it’s helpful to understand how it impacts the banks. While they may be fierce competitors, they actually borrow and lend money to each other all the time!

After all of the lending activities, customer withdrawal and deposits, a bank may have a shortage or surplus of cash at the end of the business day.

The banks with extra cash often lend money overnight to banks that have a shortage. The borrower must pay back the money and interest at the start of business the next day. These exchanges help the banking system remain stable and liquid.

Overnight rate
This is the interest rate charged on the loans banks make to each other in the overnight market. The Bank of Canada can intervene in the overnight market at the target rate if the market rate is moving away from the target.

Why does the Bank of Canada increase and decrease interest rates?

The higher the policy interest rate is, the more expensive it is to borrow money. When interest rates go down, people and businesses are encouraged to borrow and spend more which boosts the economy. 

But if the economy grows too fast, it can lead to rising inflation and hurt Canadians like having high levels of household debt and inflated housing prices. The Bank will then raise interest rates to slow down borrowing and spending. This puts a brake on inflation to stabilize housing costs and reduce debt.

The Bank made a 0.25% increase in July and has hiked it a total of four times since mid-2017.

But what about me? How do the interest rates affect my mortgage and other debts? 

An increase in the policy interest rate doesn’t affect people who have fixed rate mortgages. 

But a rake hike could lead to an increase in variable interest rates resulting in people paying more each month. Mortgages, lines of credit, car loans, student loans and credit cards may have variable rates. 

Let’s say you had a variable rate mortgage in the amount of $400,000 amortized over 25 years. If your mortgage rate is 2.35%, then your monthly mortgage payment would be $1,762. 

But if the prime rate were to go up by just 0.25%, your mortgage rate suddenly increases to 2.60%, and your monthly mortgage payment goes up to $1,812. It may not look like much, but it definitely adds up over time. 

More on the Overnight Target Rate
Here are a few articles if you want to know more about policy interest rates: 
• Bank of Canada holds key interest rate steady at 1.5%
• Bank of Canada holds rate steady for now as NAFTA uncertainty weighs 
• Target for the Overnight Rate

It’s always been important for me to explain important aspects of the real estate industry to the people and make sure they understand relevant news in today’s market.

Let me know if you have any questions about interest rates or anything else about real estate. 

TREB Supreme Court Decision

There was an important ruling in the Supreme Court and I wanted to explain how it might affect you. Don’t worry, it’s great news!

What happened?
Last week, the Toronto Real Estate Board (TREB) lost a seven-year battle with the Competition Bureau to prevent home sales data from being published online. They claimed that they were trying to 'protect' consumer privacy.

But the Supreme Court ruled that TREB was being anti-competitive and they must now make the data available to the public.

Before this court decision, Canadians had limited ways of knowing what properties were sold for. With this ruling, more websites will publish sold information so anyone can see the prices. 

About the Toronto Real Estate Board
The Toronto Real Estate Board is a not-for-profit corporation and it is Canada’s biggest real estate board with over 50,000 licensed real estate brokers and salespeople.

Just like accounting and some other professions, every realtor in Toronto is required to be a member to maintain their real estate license. Given how many members there are, not everyone will agree with the position TREB takes.

More transparency
The truth is some realtors see this ruling as a threat to their job while others welcome this change because people will be more educated to make better choices. A real estate agent whose priority is their client’s interest over profit will provide more value in many other ways than just showing numbers.

In fact, even before this ruling, many realtors were distributing  sold data because, like me, they believe in empowering people with more information to make better buying and selling decisions.

How more data helps buyers and sellers
Here are three ways buyers will be able to use data on sold prices to make better decisions:

  1. You can easily get more accurate information on how much your desired home is actually worth rather than relying on someone else to tell you.

  2. You’ll get to see the entire sales history and if a house isn’t selling. Then you can dig deeper to see if there are any red flags.

  3. You can be more prepared and ask specific questions to your real estate agent about the information you found.

With easily accessible information, sellers can have a better sense of how much they should list their home for to maximize their returns rather than relying solely on their real estate agent.

I tell the stories behind the sales
I’m thrilled people will be able to get more information so we can collaborate and choose the best strategies based on what’s going on in the market.

Whenever I work with buyers, my job is to not only provide them with information, but to also tell them the stories behind the numbers in addition to answering questions about the full purchasing process.

A database alone can’t tell you specifically why one house sold for $500,000 while another similar property sold for $450,000. But I can tell you what’s going on behind the scenes because of my experience and relationships.

Are there cracks behind paneled walls? Will there be a new factory built the building?

I had one client who wanted to buy a condo. Because I had sold another unit in the same building to someone else, I was easily able to call my client  so she could give honest answers to all of my client’s questions about the building and the neighbourhood.

Buyers can tap into my relationships to get the real stories and context around the prices.  
More on the decision
Here are a few articles if you want to learn more about this ruling:

I will keep you updated and help you make sense of any big changes in the real estate market that affect you.

Feel free to connect with me anytime you have questions about this news or anything else you’d like to know. 

Client Q&A: Is now a good time to sell my home?

Is it Now or Never?

Is now a good time to list your home for sale? It depends. July and August are typically slow months. Kids are home from school and people go on vacations, so we see fewer listings in these months than in the Spring and Fall markets. Some people believe that less homes on the market means less competition. Others believe that buyers are taking a break so they’ll get less activity on their home.

As always, I tell people to focus on their personal situations as opposed to the market, which we cannot predict. If you are in a rush and need to buy and sell quickly, then now may be a good opportunity. If you can afford to wait,  then September/October may be a more optimal time with activity typically ramping up during those months.

With the housing market getting all the attention these days, the condo market is still very strong. Those who are priced out of freehold homes are buying condos, and this means increased competition. The average price of condos rose from $393,858 in Q1 of 2016 to $489,551 in Q1 of 2017 – a 24.3% increase. Tightening mortgage rules and stress tests are also a contributing factor to rising condo prices due to decreased purchasing power.

The 16-point plan and beyond...

Seeing into the Crystal Ball

The real estate market for freehold homes has cooled significantly over the last few months. Since the government of Ontario introduced the 16 point plan many buyers have chosen to put their search on hold. Less buyers mean less bidding wars.

At the beginning of the year, almost all homes that were aggressively listed were generating multiple offers. But times have changes. These days, when five houses are listed in the neighbourhood in the same price range, the best one shines while the others sit on the market (sometimes for weeks or months). We’re seeing lots of price changes too—increases on failed bidding wars, and reductions when no offers come in.

Sellers are having to adjust expectations because February and March prices are long gone. Unfortunately, we don’t know we’re at the peak until prices fall, and we won’t know we’re at the bottom until prices rise. Many claim to be able to predict the market, but no one can.

At this point, listing low and selling high usually backfires. Most buyers are tired of the bidding wars and there is plenty of inventory so they can choose to wait. I’ve been advising my clients to list at a price they are willing to accept.

What I tell my buyer clients is the same thing I’ve told them since I got into the business: If you’re buying your first property, it has to be a home, not just an investment. If you’re planning on buying something and flipping it in the next couple years, now is not the time.