If you’ve been reading news headlines recently, you’ll notice that inflation is a buzzword that has been used a lot. American inflation is now running higher than mortgage rates. Optimism about the COVID-19 vaccine rollout is leading to increased economic activity and with that comes inflation.
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Inflation is a healthy thing, although too much of it can lead to the Bank of Canada rising interest rates sooner than anticipated, and that’s the focus of this article.
What is inflation?
In simple terms, inflation is the everyday increase in the price of goods and services. Generally speaking, most countries around the world want to keep it at between two and three percent. This means that if you bought something for a dollar today, it would cost you $1.02 or $1.03 next year. Make sense?
As mentioned, inflation is a healthy thing and expected. However, similar to cholesterol, there’s such a thing as too much. To see a time when inflation was too much, we can turn back to the hands of time to the 1970’s, when it was running high worldwide, Canada included.
Chocolate bars back then used to cost 5 cents, but went up to 50 cents each within a matter of a couple of years.
When inflation moves up that quickly, it can put a real damper on the economy. As a consumer, you can be hard-pressed to afford things anymore, especially when it is going up faster than your paycheque and savings.
Inflation makes high cost items like homes more expensive. This may mean that you decide to put your luxury home buying plans on hold until there’s more certainty.
Inflation Rising Faster Than Expected
Why are we talking about inflation right now? It’s because it is rising faster than expected. Although inflation was expected in the post COVID boom, we’re getting more of it sooner than economists predicted.
Originally the Bank of Canada said that it didn’t intend to increase interest rates until sometime in 2023, however, those plans could change if inflation continues to go up at a fast pace. And if interest rates go up, so too do mortgage rates.
In the 1980’s mortgage rates rose to above 20 percent. I know that’s hard to imagine today. While I don’t expect us to get anywhere near there again, it just goes to show us the affects inflation can have on mortgage rates, as investors demand a higher rate of return to keep up with rising inflation.
The bottom line
While we’re far from sounding the alarm bells, if you have any mortgage debt that’s tied to prime rate, you might think about locking it in if it’s your belief that inflation will continue to rise faster than anticipated. That way you can protect yourself from your variable rate mortgage going up faster than you anticipated, resulting in less of your cash flow to invest in new luxury properties.
Nevertheless, it would be a good idea to keep a close eye on all of this over the coming months.