In March of 2020, the Bank of Canada dropped its overnightthe only place left to go would be negative interest rates.So, does that mean that you would get paid money to borrow.to buy a house in Canada?That sure would ease the pain of some of those red hot real estate markets like Toronto and Vancouver, where if you bought a house, you’d actually pay back less money than what you purchased it for.I know it sounds crazy, but this has been done in some European countries where they’ve got negative interest rates and a borrower would pay back less money than the purchase price.
So, how would negative interest rates affect the Canadian real estate market?
you can actually have a negative interest rate on your mortgage. The economics of this is something that can get pretty complicated and I’m not going to go that deep into that. I’m going to try to keep this a little more high-level today and what the impact of negative interest rates would be on the Canadian real estate market. he role of the central Bank of Canada and how it impacts the interest that you get on your mortgage. The Bank of Canada wants to control inflation. They’d like the rate to be between 1 and 3% on any given year. So, how they control this s their overnight lending rate. Now, that’s the rate at which banks can lend each other money back and forth on a short term overnight basis When the Bank of Canada wants to slow down the economy, they increase interest rates. When they want to add more liquidity to the market, when they want to stimulate the economy, they drop interest rates, which allows banks to in turn lend you money at a lower rate. When money is easier to access at a cheaper rate, more people will spend money and it stimulates the economy. That’s how Bank of Canada’s interest rate affects your mortgage interest rate. if the Bank of Canada was forced to go even lower than 0% into negative interest rates, would that mean you are getting.
paid to borrow that money?
kind of, maybe, not really, eventually. What would happen first is you would actually be charged to put money in your savings account. So, instead of putting it away and getting a little interest on it. You’d actually have to pay to keep it in the bank. What they’re trying to do is force people to go out and spend money instead of saving it. By spending money, they’ll stimulate the economy, but eventually, you might end up with a negative interest rate on your mortgage. Let’s look at what happens right now if you spend $300,000, you pay it off over 25 years, and you’re getting an interest rate of 2.65 which is where mortgage rates are at right now in April of 2020. Well, by the time you’ve finished paying that $300,000 house off, you’ve actually spent $405,000. But what if you had a negative interest rate? But what if you had a negative interest rate? Well in Denmark right now, you can actually get a negative 0.5% interest rate, so instead of paying back $300,000, you’d actually only pay back $279,000. That sounds like a great deal actually, and especially if you lived in some of those hot markets where prices are really, really high, paying back less money than a purchase price, that sounds pretty appealing right now. This negative interest rate thing sounds pretty fantastic right now, but what impact would it have on the Canadian.
This negative interest rate thing sounds pretty fantastic right now, but what impact would it have on the Canadian.
real estate market and prices?
First off, buyer’s saving a down payment wouldn’t be able to put money away in some sort of a basic savings account and generate a little bit of interest to accelerate their savings, because now they’re having to pay to put money away. Then more buyers would actually qualify to buy a home and those that are qualified already will be able to spend even more money, probably driving up prices. In Canadian markets where home prices already seem out of reach, accelerating home prices will put them even further behind. Investors, which now would have access to even cheaper capital, would probably be able to out muscle first time home buyers. The system we have was never really built around negative interest rates. It’s an untested idea and we don’t really know what would happen going forward if this became the new norm. Canadian banks they are not going to lose money giving you a mortgage. There’s a big economic discussion that can be had on this and that’s well above what this channel is about, but what you really need to know is that negative interest rates probably have a negative impact on the Canadian real estate economy. They’re likely going to drive up prices across the country.