It seems like a rate hike is almost certain for tomorrow’s Bank of Canada meeting.. but we need to put this in perspective… The Bank of Canada has not raised rates since July 2007… and Mr. Carney has never raised the Target rate since he took his place as Governor…. (he should be a popular person among Canadian borrowers).
But let’s put it in perspective…even if the Variable rate doubles to 4.50% from it’s current 2.25%, we would still be in historically low interest rate territory when it comes to variable mortgage rates…
A 25bps or 50bps or even a 100bps increase should only slow the housing market and not kill it….. Remember, these are EMERGENCY RATES…. The Emergency is over.. and we should want it be over… We should be happy that we’ve been able to enjoy these record low rates for so long….. the sky isn’t falling… we won’t be seeing rates of 9% or 10% or anything near that level…
Just can’t leave this one alone…
The Globe and Mail ran a great article about the recent mortgage rate hikes by the Big Banks…..Seems like more of us are questioning the latest round of fixed rate increases….
The article gave some great stats that I wanted to share… First, we should point out that Fixed rates are affected by the Bond Market for the most part but Banks also raise money through GICs… Variable rates are affected by the Bank of Canada Key Lending Rate…. with that in mind…. here are the stats from the article….
10 YEAR AVERAGE…
- 5 yr Bond 4.05%
- Big Bank 5 yr posted fixed rate 6.75%
- Big Bank 5 yr GIC 3.31%
THIS WEEK’S NUMBERS…
- 5 yr Bond 3.02%
- Big Bank 5 yr posted fixed rate 6.25%
- Big Bank 5 yr GIC 2% to 2.1%
Has to make you wonder…?
Yes, it’s true….yesterday, RBC lead the way with another interest rate hike on their 5 year fixed mortgage… followed by TD and Laurentian Bank…. It was a 0.15% increase for a new 5 year Bank Posted rate of 6.25%. This marks the 3rd increase in a month.
This latest rate increase is leaving many puzzled as the Bond Market has remained somewhat flat… the 5 yr Bond yield is currently 3.07%. A fully discounted 5 year fixed rate at TD can be had for around 4.79%.. that’s giving a huge spread of 1.72%… well above the 1.20% to 1.30% that Banks normally seek….
Okay, so why would the Banks increase the fixed rates? Sometimes Banks price themselves out of the market when they achieve their market share… and sometimes it’s just profit taking…. But don’t settle for these rates if you are looking for a Fixed rate.. the Broker Market is still offering much lower rates and the Variable rate mortgage can be had for around 1.70%….
No surprise, the Bank of Canada did not raise their key rate today, keeping it at 0.25%. This rate directly affects the Bank Prime rate which is 2.25%. But as so many Economists have forecast, this appears to be the end of the record low Mortgage rates.
But it’s not that bad… we have enjoyed record low rates (almost free money, some would say) for well over a year.. and they are only starting to climb.. we’ll be enjoying low rates Variable rates for some time yet…
In it’s press release, the Bank of Canada stated “the need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus. The extent and timing will depend on the outlook for economic activity and inflation, and will be consistent with achieving the 2 per cent inflation target.”
The big question on everyone’s mind is how fast and by how much will rates increase… Here’s what to look for when it comes to what affects Variable rates:
- Inflation (the target rate is 2% and we are currently at 1.6%…if this increases then the Bank of Canada will want to increase the Bank rate)
- unemployment (currently sitting at 8.2% if we have higher than expected unemployment then this also puts pressure to keep the Bank rate low
- Canadian $ in relation to the $U.S. (today, the Canadian $ jumped over $1.016 and a high $ is bad for Exports and Manufacturing….the higher the Bank Rate, the higher $ will usually increase)
Fixed rates are more volatile as they are affected by the Bond Market… The Bond Market seems to have priced in a 50bps increase by the Bank of Canada as Bond Yields increased by 0.126% to 3.19% at the time this article was written. The Banks have increased Mortgage Rates by 0.85% over the past 3 weeks and should hold until the Bond yields increase to above 3.40% or 3.50%….Historically, the Banks want to earn a spread of around 1.20% and 1.30%.
Royal Bank increased their fixed mortgage rates again by 0.25%….that’s an 0.85% increase in 2 weeks… Scotiabank increased their rates shortly afterwards. We can expect the other Major Banks to follow this latest increase.
What’s interesting about this move is that the bond market has not increased by the same amount…. On February 15th 2010, the 5 year Bond yield was 2.53%…today, it’s 3.08%….Mortgage Lenders and Banks want to earn a 1.20% to 1.30% spread in the wholesale mortgage market… Today’s best 5 year fixed rate mortgage is 4.39% but will increase to around 4.64%…. That puts the spread all the way up to a whopping 1.56%.
By the way, not all Lenders have increased their rates… there are still Lenders with rates in the 4.39% range but we should expect them to follow suit…