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opinion

Canada and Mexico both border an economic goliath, and are subject to that goliath’s interest rate influence.

Both countries are also free-trading, oil-rich, service-based economies with big automotive components, inflation that’s well above target, and petrol-influenced currencies.

Their similarities are enough to draw attention because Mexico’s central bank is expected on Thursday to push its policy rate into double digits for the first time ever.

Might Canada do the same? Could it do the same? And what disaster lurks if it did?

Now, I’ve always maintained Canada won’t see 10-per-cent-plus policy rates in my lifetime. Given what Mexico is about to do, let’s revisit that prediction.

Why Canada is not Mexico

Let us count the ways – as it pertains to interest rates, that is.

Compared with Canada, Mexico has:

  • a higher inflation tolerance (a 3 per cent inflation target versus our 2 per cent target)
  • a worse inflation problem (8.4 per cent vs. Canada’s 6.9 per cent)
  • a higher natural rate of interest and less stable currency
  • a much faster growing money supply
  • a weaker credit rating
  • a smaller, poorer, emerging economy with less rate sensitivity
  • 3.4 times the population with less unemployment
  • much lower debt-to-GDP ratio, and
  • debt per capita level that’s about 10 times less than ours.

In short, while Mexico can justify 10 per cent policy rates and mortgage rates. Canada simply cannot.

But what if our key lending rate did hit 10 per cent?

Imagine that an external inflation crisis drove Canada’s average mortgage rate from 5.25 per cent today to 10 per cent next year.

Our economy would collapse. Full stop.

Overleveraged homeowners would watch in horror as mortgage payments skyrocketed another 50 per cent-plus, leading to mass credit defaults and possibly the gravest Canadian real estate crash in history.

Fortunately, that’s a nightmare we don’t need to dream up because, barring nuclear cataclysm, a new plague or a similarly horrific global calamity, Canadian inflation almost certainly won’t climb high enough to warrant rates of 10 per cent. Not with a mature economy, an inflation-targeting Bank of Canada and global central bank co-ordination.

For these reasons, it’s easy to double down on a prediction that Canada won’t see a 10-per-cent overnight rate in the next few decades.

Mind you, that doesn’t mean that inflation can’t breach 10 per cent temporarily, or that the Bank of Canada won’t drive prime rate above the 6.7-per-cent peak currently implied by the bond market.

That risk is why, if you’re a mortgage shopper who’d be highly sensitive to sustained rate increases, you owe it to yourself to consider at least a three-year fixed, or a hybrid mortgage with a significant portion locked into a fixed rate.

As avid rate watchers know, our bond market is pricing in lower rates by 2024. But, as Mexican borrowers will tell you, central banks can be wrong and market expectations change quickly.

Rates in flux

The lowest nationally advertised uninsured fixed rates mostly climbed this week, by four to eight basis points. (There are 100 basis points, or bps, in a percentage point.)

But the popular two-year fixed – popular because people want to lock in for a few years and refinance lower when the Bank of Canada cuts rates – jumped a whopping 22 bps.

As for the lowest insured fixed rates, they mainly held steady. The exception was one-year and two-year terms, where Quest Mortgage launched new market-leading offers of 4.99 per cent.

As for variables, they didn’t move this week. The next shoe to drop with them is when the central bank presumably hikes again on Dec. 7. The market expects a 25-bps increase but hot U.S. and Canadian consumer price index reports this month could bump that to 50 bps.

Last, but not least, are rates for home equity lines of credit, where Tangerine finally pulled its stellar offer of prime rate minus 0.1 per cent. It’s featured that rate since 2019. The lowest-cost widely advertised HELOC now comes from HSBC, right at prime (5.95 per cent). It’ll cost you about $496 (interest-only) a month, per $100,000 borrowed.

Lowest nationally available mortgage rates

TERMUNINSUREDPROVIDERINSUREDPROVIDER
1-year fixed5.69%CanWise Financial4.99%Quest Mortgage
2-year fixed5.69%RBC4.99%Quest Mortgage
3-year fixed5.55%RBC4.99%Quest Mortgage
4-year fixed5.54%First National4.99%Quest Mortgage
5-year fixed5.37%Investors Group4.94%CanWise Financial
10-year fixed5.94%HSBC5.94%HSBC
Variable5.45%Marathon Mortgage4.75%Nesto
5-year hybrid5.50%HSBC5.56%Scotia eHOME
HELOC5.95%HSBCN/AN/A

As of Nov. 9

Rates in the accompanying table are as of Wednesday from providers that advertise rates online and lend in at least nine provinces. Insured rates apply to those buying with less than a 20-per-cent down payment, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases over $1-million and may include applicable lender rate premiums. For providers whose rates vary by province, their highest rate is shown.


Robert McLister is an interest rate analyst, mortgage strategist and editor of MortgageLogic.news. You can follow him on Twitter at @RobMcLister.