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TagFixed rates

Are you one of these people?

Was reading this survey about First Time Home Buyers that TD Canada Trust did recently...

Thought the most interesting stat was that 3/4 of the people surveyed were opting for a Fixed Rate mortgage.   And in the same paragraph, the TD rep acknowledged that Variable Rate mortgages performed better… Does any of this sound familiar?

Here’s some more good news.. well, actually it’s bad news for the Stock Market and investor confidence but it’s good news for interest rates… The 5 year Canada Bond has dropped significantly…  We were at 2.33% at one point today… meaning 5 year fixed mortgage rates should really be hovering around 3.80%… but instead we are seeing best rates at around 4.29%…   WHY?  Pure profit taking by the Banks…

But don’t fret…this uncertainty means there is less chance for rates to increase and less chance they will increase significantly…. And for those in a Variable rate, rates of 3.80% and 4.29% are still too high….  Variable rate mortgage clients are enjoying 2.00% or better…   Enjoy the summer!

Bank of Canada doesn’t change rate…for now.

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%.

Fixed Rates increase for the second time in 2 weeks..

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…

Historical rate trends favour variable rates..

Sometimes it’s just easier to see the numbers on a graph.. Here are a few updated graphs from Firstline Trust… Firstline Trust Historical Rates February 2010… Notice the spread between the Bank Prime rate and Fixed Rates… the spread is usually around 1.00% to 2.00% in favour of Variable rates.

Variable rate mortgages have outperformed Fixed rates in over 88% of the time…. here’s a great study by Professor Moshe Milevsky of Schulich School of Business… Milvesky variable rate 2008.    And here’s an article today by the Canadian Press that comments quietly, that Variable Rate should still be considered…

Hey, by the way… did I mention that we are still in historical rate territory?  If you look back at historical rates, you will see that it’s still a GREAT time to borrow money… Fixed rates in the 4.00% range… Variable rates still under 2.00%…  Doesn’t sound too bad to me…

TD and RBC raise rates by 0.60%.

TD and RBC have increased their 5 year posted mortgage rates this morning. We can expect others to follow. This comes as no surprise as the 5 year Bond Market increased to 2.87% causing the margins to shrink.

This is probably the beginning of several increases to come over the coming months. If the Economists are right, then we will see these types of hikes followed by a pause to see how the economy reacts.

We will be paying close attention to inflation, unemployment and the $Canadian dollar.

Fixing or locking in your rate may be an option for some but variable rate mortgages are still around 2.00% below 5 year Fixed Rates.

I’m still a fan of variable rate mortgages. I just think that they are a better product. But hey, that’s just me. We are all different and have different needs. Always talk to a Mortgage Broker to get your needs evaluated.