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Robert McLister: If you have a variable mortgage, Ottawa's new handouts could hit your pocket in 2025
Published on November 29, 2024 • Last updated 7 hours ago • 3 minutes reading time
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Prime Minister Justin Trudeau during a press conference in Montreal, Que., 2021. Photo by ANDREJ IVANOV/AFP via Getty Images files
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“What your government gives, your bond market takes away.”
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If Shakespeare hadn't said that, he should have, because it's true.
Governments' Christmas largesse has a hidden price and mortgage borrowers will be left footing the bill.
We're talking, of course, about the GST holiday and the $250 checks that Justin Claus is giving away for Christmas and the $200 stimulus package that debt-ridden Ontario is handing out. These deficit-financed “gifts” are more reminiscent of “forget me at the polling station” than of sustainable economic policy. Why we pay the government to give us so much money back is an interesting question, but unfortunately beyond the scope of this column.
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Regardless, more spending means higher inflation and deficits, other things being equal. And that's not music to the bond market's ears. This gives investors a little more reason to sell Canadian bonds, which increases interest rates. While we may not see this manifest in bond yields today – given the stronger catalysts impacting bonds at the moment – rest assured we will see the impact later.
The most relevant effect from a mortgage holder's perspective is higher interest rates. For example, if you have a variable mortgage, Ottawa's new handout could hit your pocket in 2025.
“As governments provide more stimulus, the Bank of Canada may do a little less,” TD said in a report Wednesday. As a result, “we have cut a quarter point from forecast” for the central bank’s overnight interest rate, it said. “We stand ready to remove another rate cut from the profile as households spend more of their rebates and tariff threats ease.”
That innocent-seeming quarter point means an additional $700 in annual interest with an average mortgage of $300,000. So while our government plays Robin Hood with borrowed money, homeowners are stuck with a law that makes their stimulus checks look like lunch money.
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“We know that people are under pressure. This should help them,” argues the Prime Minister. But that's like using gasoline to help someone put out a fire. For Canadians with a mortgage, Trudeau does more to help lenders collect extra interest than he does to help struggling homeowners. And there is a long pattern of such incentives backfiring.
A 2023 Scotiabank Economics report by Jean-François Perrault estimates that “government consumption and pandemic transfers to households account for about 200 of the 475 basis points increase in the Bank of Canada's key interest rate” during the 2022-23 rate hike cycle. Even if that's only half true, we're talking about more than $5,000 in additional interest paid by the average borrower in just two years, thanks to Ottawa's excesses.
For those worried about what the government will spend next, loosening the purse strings brings another small advantage to fixed-rate mortgages. This is particularly true if Canada's key interest rate (now 3.75 percent) is below the neutral interest rate level, which the Bank of Canada estimates at 2.75 percent. In general, the lower interest rates fall compared to neutral rates, the better the odds are with a fixed rate.
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But what if the government treated the budget as if it wasn't an all-you-can-spend buffet? The bond market would reward balanced households with lower long-term bond yields. And as the cost of living remains under control, the Bank of Canada, for its part, could keep interest rates low for longer.
According to a Fraser Institute study, delaying fiscal responsibility until interest costs rise “means that major fiscal adjustments will be needed in the future, involving deeper cuts in program spending and increases in tax rates, with significant economic and social costs.” will pull.”
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By holding our managers responsible for sustainable financial management, we create a higher standard of living for everyone in the long term. This is what all Canadians should demand from politicians, not just the mortgage holders who foot Ottawa's bill.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
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