Looking Back at 2019
One of the biggest surprises in 2019 was the movement in interest rates. In 2018 we saw a large rise in interest rates, and in 2019 we saw the complete opposite - a decrease. As the 5 year bond yields fell by almost a full percentage, since its peak in late 2018, fixed mortgage interest rates followed suit.
The result of the lower interest rates in 2019 boosted our housing market, as we saw a turn in our real estate market in October 2019. However, households did not get a lot of relief in debt costs, as it led to an acceleration of mortgage credit growth. In our 3rd quarter of 2019, the debt-service ratios (of household debt) rose from 14.7% to 15%. This is the highest level of household debt-service ratio.
So, you're probably asking: Why did we have higher debt-service ratio in 2019 when interest rates dropped? This is because it takes time for low rates to pass through. 45% of Canadians have a 5 year fixed mortgage, therefore, those who are renewing their mortgage in 2019 from 2014 are still facing higher rates compared to 5 years ago (about 0.35% more in interest).
With the consistent decrease in fixed interest, many of us expected at least one decrease on our overnight lending rate - which would affect our unsecured debts and variable interest rates. However, Bank of Canada held it's overnight rate steady in all of 2019. This was due to global events, the trade war between US & China, recessions, as well as decreasing yields. This was a surprise compared to the 1.25% increase in the past 2 years.
What to Expect in 2020?
What can we expect in 2020? Well, our debt-service ratio should decrease back to 14.7% as lower rates from 2019 will pass through to households. There is talks that Bank of Canada (BOC) will likely cut the overnight rate, therefore, households can catch a break on unsecured debt. If BOC does cut their overnight rate, we should expect fixed mortgage rates to decrease as well. However, if the BOC continues to hold our overnight rate steady, we should expect fixed rates to increase by 0.20 to 0.25% (yes, increase! So get those fixed rates held). As well, if our global economy avoids recession, we should expect bond yields to increase in 2020 to 2021, and fixed mortgage rates will follow suit. One thing we cannot expect are low interest rates to be indefinite in 2020.
*The information above is taken from BOC: Monetary Policy Report and TD Economics
If you have any questions, please contact Jessica Kuan at jessica.kuan@cleartrust.ca
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