Mortgage Matters

With the Canadian economy doing surprisingly well over the past six months, many see higher interest rates from the Bank of Canada in the not so distant future, but according to a report released Thursday from CIBC’s chide economist Avery Shenfeld rates are likely to remain at a very low 2.5% through to 2011.

Historically, as far as interest rates are concerned, it is better to float your mortgage interest rate (i.e., choose a variable rate mortgage). This is a result of the “yield curve.” The “normal” yield curve is positively sloped, with interest rates lower for short-term maturities (one to two years) and higher for longer-term maturities (five to 30 years). When the economy strengthens, the Bank of Canada will raise short-term interest rates (they only have control over short-term rates) and the base for variable-rate mortgages (usually the prime rate) is moved higher. This action signals a period of “tightening” of monetary policy to cool the economy and reduces inflationary pressures.

The vehicles that determine longer-term interest rates — bonds — tend to move according to inflationary expectations: If bond investors anticipate inflation (because of economic growth), they demand higher returns (interest rates) as protection from inflation. When the Bank of Canada is perceived as “fighting” inflation by raising short term interest rates, long-term rates have a tendency, in most cases, to remain stable or improve, because long-term bond investors are content that inflation will not grow.

In essence, while short-term interest rates may go up, they do so only until the Bank of Canada has slowed the economy enough to curb anticipated inflation. Then, as economic growth slows, the bank starts to lower them. The yield curve will flatten (with higher short-term interest rates) for a time, but when the economy slows, short-term rates will go back down and the yield curve returns to its “normal” positive slope.

Over this time, variable-rate mortgages will move up to being approximately equal to locked-in five-or 10-year rates, but that’s followed by a period when they return to lower levels. More often than not, over this time, it is less costly to have held the variable rate debt. Exceptions to this situation would be times of hyper-inflation (like in the 1980s) when short-term interest rates went to extreme levels.

The economy is strengthening and short term rates will go up a bit over the next couple of years, but I don’t think it will be dramatic. The case for variable-rate mortgages remains strong.

Source: Financial Post Magazine, Tuesday April 6th & Julie Fortier, Financial Post, Thursday April 8th 2010

Mortgages interest rates, Short Term Interest Rates, Variable Rate Mortgage

Last Updated: Monday, March 29, 2010 | 11:23 AM ET
CBC News
Royal Bank and TD Canada Trust announced Monday they are increasing several mortgage rates by up to 6/10ths of a percentage point.

The biggest jump is attached to the popular five-year fixed closed rate, which moves from 5.25 per cent to 5.85 per cent at both banks. That’s the posted rate, which is routinely discounted by the big banks.

RBC’s new discounted rate for the five-year term also rises 6/10ths of a percentage point to 4.59 per cent. TD’s rises the same amount to 4.55 per cent.

Both banks also raised their three-year and four-year fixed closed rates. The posted three-year rate at Royal Bank climbs one-fifth of a percentage point to 4.35 per cent, while the posted rate at TD jumps 4/10ths of a point to 4.70 per cent.

The posted four-year rate at both banks jumps 4/10ths of a percentage point to 5.34 per cent.

Other banks are expected to follow suit. The new rates, effective Tuesday, represent the first hike in Canadian mortgage rates since last October.

Variable mortgage rates, which rise in tandem with the Bank of Canada’s key overnight lending rate, are unchanged. But they are likely to be heading up soon too.

Bank of Canada governor Mark Carney warned last week that inflation was higher than expected. That had some market watchers forecasting that the central bank could move to raise its key lending rate as early as June.

The key rate has been at a rock-bottom 0.25 per cent since April 2009 to help the economy recover.

Fixed-rate mortgage rates tend to move higher when long-term bond yields rise.

A survey released last week by RBC found almost two-thirds of respondents expected the cost of servicing a mortgage to rise this year.

Mortgages Fixed Rate Mortgage, Interest Rate Increase, interest rates, Rate Hike

As a result of stubborn inflation and stronger then expected economic growth signs are becoming more clear that Canadians could be seeing interest rate hikes sooner then previously anticipated.

Bank of Canada’s Mark Carney did not directly state that higher rates were on the way however, he did issue his clearest indication to date that his year-old commitment to keep the policy rate at the record 0.25 per cent until July was “expressly conditional” on inflation remaining tame.

In a speech to a business audience, the bank governor noted that both underlying core inflation and economic growth have grown slightly stronger, although broadly proceeding as expected.

The tip-off to economists was that he changed his language on his conditional commitment on interest rates, which has led to historically low rates for both consumers and businesses in Canada and helped the country recover from recession.
“This commitment is expressly conditional on the outlook for inflation,” he told the Ottawa Economic Association.

It was the first time Carney has undercut the commitment in such pointed language.
“They still have considerable latitude, but the changes that would be required to their forecast are consistent with hiking rates sooner than markets are anticipating,” said Derek Holt, Scotiabank’s vice-president of economics. He said Carney may move as early as June 1.

But Holt stressed that Carney’s overall message to Canadians is that rates will remain low by historical standards for some time.

“No matter what, we emerge from this with lower rates at the end point of the hiking campaign than in past cycles. He’s saying the outlook is clouded with risks and there’s a number of reasons to expect growth to be lower than past cycles.”

For more interest rate information contact Verico Designer Mortgages Inc.

Source: Julian Beltrame, The Canadian Press

Uncategorized Bank of Canada, Economic Growth, Inflation, interest rates

The Bank of Canada took its first steps Tuesday toward returning the country to more normal interest-rate levels by signalling a more hawkish tone on inflation and acknowledging the economy is performing better than expected on “vigorous” consumer demand.

The messages were conveyed in the Bank of Canada’s latest interest-rate statement, which kept its record-low benchmark rate of 0.25 per cent and pledged to keep it there at least until July.

But most bank watchers took note of subtle changes in the statement, compared with previous rate announcements, and there was enough there for them to begin the countdown to rate hikes.

“I suspect (Bank of Canada governor) Mark Carney and company are starting to feel the urge to tighten — not a strong urge now, but an urge nevertheless,” said Michael Gregory, senior economist at BMO Capital Markets.

Among the key changes was a declaration from the bank that the risks to its inflation outlook are “roughly balanced,” and no longer “tilted slightly to the downside” — language that suggests deflation is no longer a concern and that price increases are creeping up to a level that may prompt a response.

The wording change from the Bank of Canada may appear trivial, “but it is nonetheless significant as it reflects an economic backdrop that continues to improve at a much faster pace than what the bank had envisaged,” said Paul-Andre Pinsonnault, senior fixed-income economist at National Bank Financial.

In the statement, the central bank acknowledged economic activity has been “slightly higher” than its own projections, with the five-per-cent gain in the fourth quarter powered by “vigorous domestic demand” and a recovery in exports.

The consensus remains that the central bank will wait until July to begin raising rates. There are two more scheduled rate decisions between now and then — April 20 and June 1.

“What we saw (Tuesday was) one of many steps aiming at moving away from dovish statements to relatively more hawkish ones,” said Sebastien Lavoie, economist with Laurentian Bank Securities.

His firm predicts rate increases will begin in the third quarter, but he said the odds have increased that the first hike will be in July as opposed to September.

Economists are predicting increases of one full percentage point to 1.5 points over the second half of 2010.

Source: Paul Vieira, Canwest News Service

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Mortgages interest rates, Rate Increase

The Bank of Canada is keeping its benchmark lending rate at a record low of 0.25 per cent, reiterating on Tuesday its conditional commitment to hold rates steady until the middle of this year.
Although it held the overnight lending rate steady, the bank acknowledged the recovery appears to be proceeding at a better pace than it had anticipated.
“The level of economic activity in Canada has been slightly higher than the bank had projected in its January Monetary Policy Report,” the bank said in announcing the rate decision.
“Conditional on the current outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”
It is set to release its next decision on interest rates on April 20.

Source: CBC News
For more information please contact Verico Designer Mortgages Inc.

Mortgages Bank of Canada, interest rates

A quarterly Reuters poll published last Thursday indicates growth from the Canadian economy in 2010. This growth however is not indicated to be prompt enough to influence the Bank of Canada to raise interest rates anytime soon.

The survey consisted of around 20 economists, conducted over the past week, with their predictions on how the Canadian economy will emerge from the recession. The general consensus was growth by an annualized 2.5% in 2010, in line with predictions from the same poll in October.

The poll comes as the Bank of Canada this week held its key interest rate at a record low, as expected, and changed growth forecasts only slightly, highlighting weak U.S. demand and a strong Canadian dollar as risks to the recovery.

“The growth will come as the Bank of Canada notes in its press statement from the domestic side, which is benefiting from the record low interest rates and fiscal stimulus,” said Sal Guatieri, senior economist, BMO Capital Markets.
“So we should continue to see strength in housing markets, auto sales and generally a pick up in consumer spending. As well, the upturn in commodity prices should support business investment.”

The domestic economy has been aided in part by the Bank of Canada slashing rates to an all-time low near zero, where it has pledged to keep them until the end of June next year as long as inflation stays in check.

The poll shows economic growth is not expected to be forceful enough to spark a rate hike any time soon, with the median forecast in the poll not calling for any monetary tightening until July at the earliest.

The median forecast of the poll has the Bank of Canada keeping its key rate steady at 0.25% until the third quarter, when it is expected to raise it to 0.75%. It is expected to raise the rate further to 1.25% by the end of 2010, the poll showed.

Housing starts are expected to average 173,000 units in 2010, up 8.5% from the 159,400 units forecast for this year in the October poll. For 2011, housing starts are forecasted to rise to 180,000 units the median forecast showed.
Information from Jennifer Kwan, Reuters, Financial Post

For more interest rate information please contact Verico Designer Mortgages Inc at 1-866-824-8057.

Reviews Bank of Canada, interest rates

OTTAWA, Ontario, October 20, 2009 — The Bank of Canada held its benchmark overnight lending rate steady at 0.25 per cent at its setting on October 20th, 2009. The trend-setting Bank rate, which is set 0.25 percentage points above the overnight lending rate, remains at 0.5 per cent.

The Bank acknowledged that recent indicators point to the start of a global recovery, and that economic and financial developments have turned more favourable than it had previously expected.

In its September announcement to hold interest rates steady, the Bank forecast that inflation would return to its two per cent target in the second quarter of 2011. The Bank has now moved that date out to the third quarter of 2011.

The Bank’s commitment to keep interest rates on hold until the second half of next year is conditional on the outlook for inflation. Since inflation is not expected to pick up sooner than it previously expected, the Bank repeated its commitment to keep interest rates on hold. “Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.”

The Bank pointed to the rapid rise in the Canadian dollar in recent weeks as a risk to the Canadian economic recovery, saying “Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures.” The Bank now expects that the domestic economy will be a greater source for economic growth, at the expense of weaker net exports.

“The Bank threw cold water on recent speculation that it may raise interest sooner rather than later,” said CREA Chief Economist Gregory Klump. “By highlighting the recent rapid rise in the Canadian dollar while intentionally failing to mention the rebound in the Canadian housing market as sources for concern, the Bank aimed to end recent speculation that it will hike rates before its repeated pledge of not doing so until at least July 2010.”

As of October 20th, the advertised five-year conventional mortgage rate stood at 5.84 per cent. This is down 1.36 per cent from one year earlier, but stands 0.35 per cent above where it stood when the Bank made its previous interest rate announcement on September 10th.

Improving credit market conditions have enabled lenders to reintroduce discounts off posted mortgage interest rates. Discounts of up to a percentage point can be negotiated, depending on lender-broker relationship.

News source: The Canadian Real Estate Association (CREA)

Reviews Bank of Canada, interest rates

Many lenders have raised their interest rates on 5 year and longer fixed rate mortgages.

Why is this happening?

Banks lend more money than they take in through deposits.  In order to meet the demand for customer loans, they borrow money in financial markets. To ensure they are not taking interest rate risk, they lock in the rate on the money they borrow to match the term of the mortgage. For example, a 5 year fixed mortgage is funded by a 5 year fixed rate bond. In May, the rate on longer term bonds started to rise, meaning the banks cost of funds - the cost to the bank of raising the money needed to loan to customers — went up. When they pay a higher rate to borrow in the bond market this reduces their profit margins. This is why rates on the longer term fixed rate mortgages have increased. The relationship between bonds and mortgage rates is not new. Attached is a chart that shows how bonds track closely with mortgage rates. They tend to go up and down together.The good news is that the upward trend in bonds prices is a positive sign that consumer and investor confidence is on the mend.

What does this mean for you? 

For those of you who are in a variable rate and want to switch to a fixed rate, the general rule is as follows: The variable rate mortgage is usually a 5 year term, if you want to switch into a fixed rate in year two of your mortgage term you may switch into a 3 year term (the remaining term of your mortgage) 

Million Dollar Question, should I switch into a fixed rate now? 

This week in the Bank of Canada’s announcement they maintained their overnight target rate at ¼ per cent (prime remains the same at 2.25%) and they reiterated their conditional commitment to hold the current rate until middle of next year – on condition that inflation did not rise above their inflation target. What we are hearing is that the prime overdraft rate should stay the same until next year, what we are seeing is that the longer term fixed interest rates are increasing.  You should be asking yourself; at what point if any do you want to lock into a fixed rate.  Fixed rates are at all time low, we are told this is the bottom – do you want to lock in now loose your good rate or hold on for awhile – at what point will you be ready to switch if at all? 

Tough decision!

Reviews fixed rate mortgages, interest rates, rate increases

It means that you can get a 5 year fixed rate Mortgage for as little as 3.69% Quick Close Special (the lowest in Canadian history) and a variable rate at 2.85% (Prime plus 0.60).

Another important point, never before made, is that the Bank of Canada is going to hold the overnight lending rate steady until June 2010.  

So if you currently have a variable rate, now is not the time to lock in if the Bank holds true to its promise.

Many people who are in fixed rates are looking at refinancing their mortgages into lower rates.  The penalty to break an existing mortgage is the greater of three months interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.  Whether this is worth your while can only be decided on a case-by-case basis.

I listened to Benjamin Tal, chief economist of CIBC and his comments regarding the variable rate mortgages where as follows:

“You might do better the first two years [of a five-year mortgage] but not the remaining three. I’m convinced long-term interest rates will rise. I can see [long-term] rising 200 basis points. These are emergency rates and at some point this emergency will end,” says the economist.

The banks and the mortgage insurers are becoming more stringent on their lending criteria; minimum credit score requirements have increased, if you are self-employed they are wanting more documentation and appraisals are getting harder too – they look at the appraised value as opposed to the purchase price.  If your credit is less than perfect, this can also be challenging, that is why we are finding more and more people seeking out the expertise of an accredited mortgage professional.

Written by:  Charmaine Idzerda, (AMP) Mortgage Broker   FSCO# M080000747
Verico Designer Mortgages Inc.  www.DesignerMortgages.ca    FSCO# 10194
Tel: 905.336.5997, Tollfree 1.866.824. 8057

Reviews Bank of Canada, interest rates, rate hold