When the U.S. sneezes, Canada gets a cold… I’m getting the sniffles…mortgage rates are headed up.

US sneezes Canada catches coldYesterday, the U.S. Fed Chairman, Ben Bernanke, announced he ‘could’ start to ease their stimulation of the economy later this year.   That small announcement has had a huge impact on the global stock markets and bond yields.   Stock Markets are down around 2.00% around the world as of 2.30pm today.

The U.S. has been buying around $85billion worth of bonds every month in an attempt to keep interest rates low.  And with that simple announcement yesterday, the world’s markets have reacted.   Bond yields have started to climb…

Our own 5 yr Govt of Cda bond yield is up to 1.75%.  That’s up around 10bps from yesterday, and up 60bps from the beginning of May.  In fact, we haven’t seen these levels since October 2011 and again in March 2012.   We already received warnings from our Lenders that wholesale mortgage rates are likely to go up.   Remember, bond yields affect Fixed mortgage rates.. but they will have an indirect affect on Variable rates, too.

Could this be the long-awaited interest rate hike that our Canadian Govt has wanted for so long?   Or is this just another test to see how the markets will react?    Well, if it’s a test, the test failed.  Markets are overreacting negatively.    But experts believe this is the beginning of rate hikes…   With that in mind, and with 5 yr fixed rates now at 3.09%, our attention to turns to Variable rate mortgages…  One Lender has already reduced their Variable rate mortgage to Prime less 0.40%.  Another is offering a NO FRILLS Variable at Prime less 0.50%.

Variable could, once again, become the product of choice.   My test for choosing Variable is this…. -the spread should be around 1.00% better than the best 5 yr fixed rate, you must be able to exit the product with a 3 months interest penalty, and you must be able to lock into the BEST DISCOUNTED rate that the Lender has to offer (this last clause is the most important and is not offered my many Lenders… beware those products that sound too good to be true).

We also need to look at longer term fixed rate products… for now, the best 10 year Fixed rate is 3.59%… This is looking like a good option…but this is sure to go up as these bond yields rise.

My best advice is to speak with a Mortgage Broker.  A good broker will compare products but also give you advice and direction.

Your best interest is my only interest.

As always, I welcome your comments, calls and questions.

Steve Garganis 416 224 0114 steve@mortgagenow.ca

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