Another self inflicted US crisis is underway; the US Government has shutdown as of October 1, 2013 and overnight 800,000 Americans have lost their jobs. To put this in perspective, imagine the whole population of Mississauga and Oakville being unemployed overnight!
Canada's Prime Rate Impact
How does this chaos affect Canada's mortgage rates?
- US Federal Reserve is committed to its bond buying stimulus program till unemployment is at 6.5%. Currently, unemployment in the US is at 7.3% and with 800,000 Americans losing their jobs and the ripple effect of small businesses that do business with the US Government, the unemployment rate will increase if the shutdown is prolonged hence would force the US Federal Reserve to maintain its stimulus program and ultra low benchmark rate (prime rate)
- Bank of Canada's second in command, Tiff Macklem, said this week the Bank of Canada is lowering its outlook for Canadian GDP for this year and 2014
- August's core inflation was at 1.3%, well below Bank of Canada's target of 2%
- Bank of Canada's benchmark rate cannot deviate far off US Federal Reserve benchmark rate since it would result in a higher Canadian dollar which negatively affects exports, i.e, bad for the economy
With the prospect of the benchmark rate (prime rate) holding steady for one to two years, the case for variable mortgages is stronger today. There are two catches however:
- Applicant has to qualify based on the posted 5 year rate, which is at 5.34% today.
- If US Government defaults mid October, we all remember what happened in 2008 when the financial market seized and costs of borrowing spiked since no one was willing to lend money (supply of money disappeared overnight), cost of borrowing would increase.
If you are looking for professional mortgage advice based on facts, numbers and detailed analysis, please contact Nawar.