This article was provided by Deborah Fehr of Dominion Lending. She says that: It is a great time to buy a home in Kamloops. Mortgage rates are at almost rock bottom levels and it looks like there may be a rate cut instead of increase in September. Of course if you have a rate hold now and rates go down before you close your deal, you will get the lower rate. Read the article I included below.
46% probability of a rate cut Sept. 7. 100% probability of a rate cut by year-end.
That’s what prices of closely-followed overnight index swaps (OIS) were implying at the close of business on Monday. OIS trade on market expectations for Bank of Canada rate moves.
That amounts to a 180 degree swing in market psychology. Just a few weeks ago traders were pricing in a rate hike by January.
“As we’ve seen, markets can swing and perception can swing quite aggressively, and we could well be back to a fall expectation [of a rate hike] in a month’s time,” said RBC economist Eric Lascelles to the Globe & Mail.
Lascelles counterpart at Scotiabank, Derek Holt, says: “Any talk of the Bank of Canada hiking this year is just foolish in my opinion.”
Peter Gibson, chief portfolio strategist at CIBC World Markets notes: “I think it’s clear that there are a lot of serious problems still in the world and it’s more likely that we’re setting the stage for a sustainably low level of interest rates for a very long time.”
And that is the takeaway here.
Despite the roller coaster of emotions as of late, this about-face in rate assumptions reminds us of the necessity to focus on long-term trends. Long-term, North America’s prognosis still seems compatible with low-growth and low-inflation. That’s an environment where fixed mortgage rates typically underperform.
This article appeared on the Globe and Mail on August 9th, 2011 and was written by Richard Blackwell.
Canadian fixed-term mortgage rates could fall to even more affordable levels after roiling financial markets pushed the yield on five-year government bonds to record lows on Tuesday.
As investors fled equities in recent days, money poured into the haven of Canadian government bonds, pushing prices up and yields down sharply. Because banks borrow government bonds to help finance their fixed-rate mortgages, there is a tight link between five-year bond yields and five-year mortgage rates.
“We have seen a precipitous drop in five-year bond yields,” said Toronto-Dominion Bank chief economist Craig Alexander, mainly because Canadian bonds look so attractive because of the country’s positive fiscal situation.
Since July 21 the yield on those bonds has dropped a remarkable three-quarters of a percentage point, Mr. Alexander said, hitting an all-time low of about 1.5 per cent on Tuesday.
Five-year mortgage rates tend to move in lock-step with that yield, but about 1.1 to 1.4 percentage points higher, and with a lag of up to several weeks before major lending institutions react with their changes.
“The lag is really about financial institutions assessing whether the movement is going to be sustained,” Mr. Alexander said, noting that the time for them to react varies. In the current volatile market, financial institutions won’t likely move until they see whether bond yields stabilize for a period of time, he said. “There is a distinct possibility of a decline in five-year mortgage rates, but it is not clear [yet] how much of a decline there will be.”
He expects to see a drop in mortgage rates, but perhaps not as dramatic as current bond yield numbers would suggest.
For home buyers, or those looking to renew their mortgages, the prospect of lower five-year mortgage rates is very positive, said Alyssa Richard, founder of the mortgage-rate tracking website RateHub.ca. Five-year mortgage rates, on average, have been at about 3.5 per cent in recent weeks, she said, but if current bond yields are maintained those rates could drop to below 3 per cent, a level not seen before in Canada.
Such a drop would save a home buyer almost $1,200 a year on a $360,000 mortgage amortized over 30 years, Ms. Richard noted.
People holding variable-rate mortgages will also likely get a break, she said. Variable rates – which are linked to the Bank of Canada’s prime rate – will rise after the central bank’s next rate increase. But with U.S. Federal Reserve Board Chairman Ben Bernanke having said Tuesday that he will hold U.S. rates steady for two years, and the Canadian economy growing only marginally, Bank of Canada Governor Mark Carney is not expected to hike rates until next year at the earliest.
For Canada’s real estate market, which has shown some signs of softening, the prospect of even cheaper mortgages could provide a welcome shot in the arm.
“The Canadian real estate market has nine lives,” said Benjamin Tal, deputy chief economist at CIBC World Markets Inc. “Every time it looks like it’s going to slow down, something happens somewhere else in the world and interest rates stay low. The market could have been a lot weaker if not for such things.”
Still, low interest rates can also send the wrong signal to some people, said Louis Gagnon, finance professor at Queen’s University in Kingston, Ont. “Many will enter the [real estate] market at prices that are too high, with very little equity, and they will run into trouble later when rates begin to go higher.”
Deborah Fehr of Dominion Lending provided this article below that was written by Tom Fennell on Tuesday, July 19th, 2011.
If there’s one question being kicked around the barbecue more than any other this summer, it’s probably this: should I lock in my variable rate mortgage? But with interest rates bouncing around, to the point where they make a mortgage-rate chart look more like the diagram of a rollercoaster, homeowners can be forgiven if they are hesitant.
After all, every time mortgage rates rise, they seem to come back down again. Recently, Royal Bank tried to raise mortgage rates, increasing the cost of its five-year fixed mortgage by 0.15 per cent, only to quietly lower them a few weeks later.
What gives?
On the variable side, rates have been stable, holding at 2.1 per cent for so long it seems like the new normal. They are priced based on the Bank of Canada rate. And with the U.S. economy slowing (Alberta created more jobs than the U.S. did in the last quarter), it’s little wonder that Bank of Canada governor Mark Carney decided not to raise interest rates this week – and it’s doubtful he will anytime soon.
While the variable rate has held steady for months, fixed-rate mortgages are far more difficult to predict. Fixed mortgages are primarily priced off of the five-year bond, and as a result are subject to volatility in the bond market, which is being whipsawed by the European sovereign debt crisis.
As more European countries edge toward default, interest rates have risen on their bonds, in some cases to more than 10 per cent. Many investors, however, fearing widespread defaults, have fled to the safe haven of the U.S. bond market. In the process, that has kept U.S. rates in the 2.3 per cent range, and helped keep mortgages rates low in this country, with a five-year fixed term mortgage going as low as 3.29 per cent.
But these bedrock-low rates could rise quickly if the U.S. does not solve its own debt crisis. President Obama has asked Congress to lift the country’s debt ceiling — the amount the country can borrow to meet its obligations. The Republican-controlled House of Representatives is refusing to grant the increase until Obama makes deep cuts to government expenditures.
They have until Aug. 2 to solve the impasse and if nothing is done, the U.S. will default on the latest round of payments it has to make on its debts. Bond rating agencies have already said they will downgrade U.S. bonds if a default occurs. If that happens, it will drive up interest rates in the U.S. and push rates up on Canadian mortgages in the process.
“If Europe gets into trouble and the U.S. gets into trouble, money will be looking elsewhere,” says Kelvin Mangaroo, founder and president of RateSupermarket.ca. “Interest rates have been bouncing around and we might continue to see that until the U.S. credit situation gets sorted out.”
Could the uncertainty in Europe actually drive interest rates lower in Canada?
If Obama and Congressional Republicans come to an agreement, there could be a sudden flight to quality as investors buy U.S. bonds. That could drive down interest rates on the U.S. five-year bond, and reduce rates on Canadian fixed mortgages.
“There is always the possibility that they could drop a bit still,” said Mangaroo. “They’ve been lower before, so there is no reason that they can’t go back.”
With so much volatility in the market, should you lock in your mortgage? It’s hard to say, but studies have concluded you are better off holding a variable mortgage. Then again, those studies also include periods of extremely high interest rates, but with rates now at historic lows they would only go marginally lower.
In fact, you can purchase a 10-year mortgage for just 4.84 per cent and a 25-year at 8.35 per cent. In effect, you could lock your mortgage costs in at today’s historic lows and that would pay dividends long after the crisis in Europe and the U.S. has passed and rates are rising again.
Whether to lock in or not is the most common question Mangaroo gets at RateSupermarket.ca. About one-third of Canadian mortgages are variable, but Mangaroo says, “It all comes down to risk profile. And interest rates will be going up, so if you’re uncomfortable with that, you should look at a fixed five-year term which is at 3.5 per cent.”
But one thing is certain. If you hold a variable mortgage, you can breathe a little easier knowing Carney won’t be raising rates anytime soon. Ian Lee, director of the MBA Program at Carleton University, says this is because of the ongoing failure by the European leadership to address, let alone resolve, the growing Eurozone debt crisis and the ongoing inability of the U.S. political leadership to seriously address their annual $1.5 trillion deficit and $14 trillion debt.
“This clearly suggests,” says Lee, “that Governor Carney will think many times before raising interest rates now or in the fall.”
Deborah Fehr, Mortgage Consultant, Dominion LendingP. 250-571-2472 E. ac.gnidnelnoinimodnull@rhefd W. www.dfehr.ca
This article appeared on CBC.ca on July 19th, 2011.
The Bank of Canada has kept its bench-mark overnight interest rate steady at one per cent, saying the need to keep the country’s economy growing amid the U.S. and European debt crises outweighs the need to slam the brakes on inflation.
In response to the central bank’s decision, the Canadian dollar has gained more than a cent in morning trading.
The Bank of Canada said Tuesday that Canada faces an uncertain international economic situation with European and U.S. debt concerns dominating the fiscal landscape.
“The U.S. economy has grown at a slower pace than expected and continues to be restrained by the consolidation of household balance sheets and slow growth in employment,” the bank said in a press release.
“While growth in core Europe has been stronger than expected, necessary fiscal austerity measures in a number of countries will restrain growth over the projection horizon.”
Thus, while Canada is growing roughly as the central bank had forecast, the country still faces a threat to its slowly-recovering export sales, partly because of weak U.S. economic growth and partly because of a rising Canadian currency.
Tuesday’s rate decision provided further lift for the Canadian loonie. The currency traded at $1.053 US in mid-morning, up from Monday’s Bank of Canada close of $1.043 US.
Growth versus inflation
Economists had split as to whether the bank would raise its overnight borrowing rate or keep the trend-setting interest rate at its current, record-low level as the July decision approached.
Late last year, Bank of Canada governor Mark Carney talked extensively about the need for Canadians to rein in their personal debt levels, a signal many experts interpreted as the central banker about to get tough on rising prices.
Indeed, many economists began predicting that the bank would boost rates in July, especially after three months — March, April and May — when inflation popped above the central bank’s one-to-three-per-cent target range for price growth.
Carney, however, began signaling a change of sentiment in June when he talked about the financial “headwinds” Canada faced in an interview with the Wall Street Journal.
His wording lead to a subtle shift in thinking among Carney watchers.
“The hard place that Carney is caught between is the growing risk that Canada’s economy will underperform expectations if U.S. demand remains weak and/or Europe’s credit crisis erupts and spews lava across global financial markets,” said BMO Capital Markets economist Sal Guatieri in a commentary prior to Tuesday’s rate announcement.
Economic growth — something central bankers are trained to generally ignore — began pushing out concerns over rising prices in the bank’s thinking, experts said.
Still, many economists believe the Bank of Canada will boost interest rates towards the end of 2011 as long as the Canadian economy keeps to its current decent GDP growth path.
RBC Economics, for example, currently predicts that Canada’s economy will grow at a 3.2 per cent clip in 2011, equal to the growth rate for 2010.
Europe and America
There are growing fears that the Greek debt crisis is spreading to other European countries, especially the continent’s third biggest economy — Italy.
As well, the administration of U.S. President Barack Obama has so far failed to reach a deal with the U.S. Congress over whether to raise Washington’s borrowing ceiling.
Failure to get an agreement by Aug. 2 risks placing the world’s largest economy in technical default of it debt obligations.
Both situations hold the potential to drive the global economy back into a recession similar to the one in 2008-09 or at least to reduce the potential economic growth for most countries, experts have warned.
Into the winter
Still, the Bank of Canada said it is eyeing rate hikes into the later months of 2011.
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the Bank’s statement said.
The central bank now forecasts that Canada will expand by 2.8 per cent in 2011 and 2.6 per cent in 2012, the year that the Bank expects the Canadian economy will reach full capacity.
