“What thy government giveth, thine bond market taketh away.”

If Shakespeare didn’t say that, he should have, because it’s true.

Governments’ yuletide generosity comes with a hidden price tag, and mortgage borrowers will foot the bill.

We’re talking, of course, about the GST holiday and $250 cheques that Justin Claus is giving out this Christmas, and the $200 stimulus that overindebted Ontario is doling out. These deficit funded “gifts” feel more like “don’t forget me at the polling booth” reminders than sustainable economic policy. Why we pay the government to give so much money right back to us is an interesting question, but alas, beyond the scope of this column.

Regardless, more spending means higher inflation and deficits, other things equal. And that’s not music to the bond market’s ears. It gives investors a little more reason to sell Canadian bonds, which raises interest rates. While we may not see it manifested in bond yields today — given the higher impact catalysts currently weighing on the bonds — rest assured, we’ll see the effects later.

The most relevant effect from a mortgage borrower’s perspective is higher rates. If you’re in a variable mortgage, for example, Ottawa’s new handouts could pick your pocket in 2025.

“With governments injecting more stimulus, the Bank of Canada can do a little less,” said TD in a report Wednesday. As a result, “We have removed a quarter-point cut from the forecast” for the central bank’s overnight rate, it says. “We are prepared to remove another rate cut from the profile if households spend a greater share of their rebates and tariff threats recede.”

That innocent looking quarter-point translates to an extra $700 in yearly interest on an average $300,000 mortgage. So while our government’s playing Robin Hood with borrowed money, homeowners are getting stuck with a bill that makes their stimulus cheque look like dinner money.

“We know people are under pressure. This is there to help them,” the Prime Minister argues. But that’s like helping someone put out a fire with gasoline. For Canadians with a mortgage, Trudeau is helping lenders collect extra interest more than he’s helping struggling homeowners. And there’s a long pattern of such backfiring stimulus.

A 2023 Scotiabank Economics report by Jean-François Perrault estimated that “government consumption and pandemic transfers to households account for about 200 of the 475 basis points increase in the Bank of Canada’s policy rate” during the 2022-’23 hiking cycle. Even if that’s only half right, we’re talking about more than $5,000 of extra interest paid by an average borrower over just two years — thanks to Ottawa’s excesses.

For those worried about what the government will spend next, its loose purse strings add one more small benefit to fixed mortgages. That’s especially true when Canada’s policy rate (now 3.75 per cent) is below the neutral level of interest, which the Bank of Canada estimates at 2.75 per cent, give or take. The lower rates fall relative to neutral, the better one’s odds in a fixed rate in general.

But what if the government treated the budget like it’s not an all-you-can-spend buffet? The bond market would reward balanced budgets with lower long-term bond yields. And with the cost of living more in check, the Bank of Canada could in turn keep rates lower for longer.

According to Fraser Institute research, delaying fiscal responsibility until interest costs surge “means that there will need to be larger future budgetary adjustments, which involve deeper cuts in program spending and a hike in tax rates that will have substantial economic and social costs.”

Holding our leaders accountable for sustainable fiscal management creates a higher long-term standard of living for all. It’s what all Canadians should demand from politicians, not just the mortgagors footing 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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