From the outset, the fabric of our economic decisions does not escape Antoine Lavoisier’s iconic quote: « nothing is lost, nothing is created, everything is transformed ». The economic malaise felt in the form of runaway inflation is by no means transitory. Sooner or later, we all must « pay the piper ».
On the other hand, it is imperative and judicious to analyze our own financial and fiscal situation to adapt to a new economic situation that will persist for several years.
We all have a mortgage and it’s one of our biggest monthly expenses. This expense has an interest rate that can either increase or decrease depending on several factors. With a term of 5 years, the variable rate mortgage is by far the most marketed by our banking industry. Admittedly, it remains the mortgage most sensitive to an increase by policymakers at the Bank of Canada.
Historically, inflation control is strongly correlated with interest rate increases. On the other hand, if the Governor of the Bank of Canada raises the policy interest rate by 50 basis points, the impact of this increase will at some point materialize on your mortgage. Undeniably, there will be a revaluation of your monthly payment.
Here is an example to better understand. A 5-year variable rate mortgage with an adjustable interest rate of 2.2%, i.e. the prime rate minus a discretionary percentage. Therefore, if you have a $250,000 mortgage, with a 25-year amortization, your monthly payment will be about $1083.
Consequently, you will be subject to a new interest rate when you renew your mortgage, which will reflect our current monetary policy. Considering that the average interest rate for variables, over the last 25 years has been 4.47%, do you have the budgetary scope to pay 1,380 $ instead of 1083 $ per month? Unfortunately, for many Canadians, the answer is no.
In addition, according to Tim Smith article in Bloomberg market, Wall Street leaders are pushing and calling for aggressive interest rate increases from central bankers, saying it would lower the risk of high long-term rates.
Pershing Square founder Bill Ackman was quoted as saying: « By raising rates aggressively now, the Fed can protect and enhance equity markets and the strength of the economy for all while stymieing inflation that destroys livelihoods, particularly that of the least fortunate ».
In short, some believe that it is impossible to raise interest rates because the impact on our economy would be irretrievable. I would just like to add: if policy managers at the bank of Canada must choose between the health and financial security of our businesses versus that of an industry or even that of your family unit, guess what the order of collocation will be?