WecanFinancial always keeps track of latest development on Commercial Mortgage market, and small business loan market, this article is going to go in some details in regards to what’s happening in Canada at the moment. During first month of the 2015, Bank of Canada lowered its overnight lending rate from 1.0% to 0.75%. This quarter of percent cut came as somewhat a surprise to consumers. The reason for the cut is forefront thinking of the Bank of Canada, trying to fuel consumer spending and affordability of credit in light of massive oil price deflation. Even though the price of oil fell almost by 50%, most of the economist did not predict any significant economic impact on Canada overall. Of course Alberta is feeling the heat, some major commercial lenders already lowered their rates twice in 2015 in this province to support the borrowing dynamics. But overall, cheaper gas means more spending money, and less expansive delivery costs. Historically these conditions were great for production engine of Ontario, and it is expected to be great this time around as well. Lower energy prices means cheaper Canadian dollar in relationship to US dollar. This is again great for Ontario’s production sector, and should fuel Ontario’s economy even further.
With the view above, it’s important for entrepreneurs and business owners in Ontario to be updated, on what’s happening with Commercial mortgages and business loans at the moment. It’s interesting that normally most commercial lenders update their prime rating within 24-48 hours of Bank of Canada actions or decisions. It’s been several days at the time of writing this article, as prime rate was lowered, but vast majority of commercial banks did not lower their own prime yet. Many commercial mortgage holders, entrepreneurs and business owners, believe this is the way banks put their interests ahead of their clients. One can argue if the prime lending rate went up, instead of going down, all of the banks would increase their prime rates right away. And most of us would be correct if thinking this. Analysts with WeCanFinancial.ca believes that if the prime rate will be left unchanged for a period of several months, most commercial banks will have to reduce their prime to save face with their borrowers. It only takes one bank to announce this and the rest will follow suite. Biggest commercial mortgage lender in Canada – TD bank so far refuses to comment on how they will react for example. We suggest our clients, especially those who are in the business plan preparation at this moment, or already holding a mortgage, to budget the current interest for at least next 3-4 months, with a long term Variable cost budget reduced by 0.25%. This reduction should be implemented for a period of 12-24 months, allowing some additional cash flow availability for operating capital needs. Capital expenditures could also be boosted thanks to this 0.25% expected reduction in interest costs.s
Obviously the above remarks relate to entrepreneurs and business owners with variable rate commercial mortgages, or combinations of variable rate mortgages and business loans or operating capital loans. In regards to fixed rate commercial mortgages, we believe they will be kept at the same level for minimum next 12 months or more. The reason behind it is that the pressure on bond market takes time to accumulate. Most fixed rate mortgages, source their money from 3, 5 and 10 year bonds, and bond pricing historically leg prime pricing by 3-9 months. Of course we had a good example in lightning fast bond pricing reaction in 2012-2013, when commercial mortgages became almost 50 basis points more expansive within 6 months period. WeCanFinancial.ca believes that this time around, we should not have a panic mode on the bond market, unless political situation in Middle East or more importantly in Eastern Europe will bring more instability this might change.
We strongly suggest our clients, and future entrepreneur clients, to start working with our firm from business plan level and up. This will allow us to prepare well balanced realistic budgets, and ask for the most reasonable business loan, operating capital or commercial mortgage amounts from the list of lenders that are best suited for the client.
Happy Financing everyone from WeCanFinaancial.ca !!!