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TagFixed rates

Wanna know where rates are going? Look at 2 yr bond yields.

Probably the most popular question asked is, “where are rates heading?”  Or “when will they go up?”   Let’s face it, if you have a mortgage or are invested in real estate, then you better know the answer or understand what affects rates.  After all, interest rates can make or break a housing market.

We decided to take a few minutes to explain how you can follow the indicators that affect interest rate movement….  We won’t make you a Financial Expert, but you will gain a better understanding of what affects rate movements…

My first suggestion is to stop paying so much attention to the news or TV… (apologies to my media friends)… but the wild headlines are there to grab your attention…  it’s not that difficult to understand…

Last week, the Bank of Canada met for the 5th time in 2012.   There are 8 scheduled meetings each year… (and by the way, this helps to keep rate movement and monetary policy more predictable…. the more predictable a Govt is, the more stable it’s economy is.)   The Key Rate is set during these meetings… this rate directly affects Variable rate mortgages…. No surprise, the Bank of Canada Governor, Mark Carney, kept the rate unchanged.

That means Bank Prime is still 3.00%.   And with more negative economic news from Greece, Spain, other parts of Europe, the U.S, and now Canada, it’s safe to say rates should remain flat for some time……(remember, bad economic news usually means rates will drop or stay low).

So the Bank of Canada’s Key Rate (also known as Target Rate or Overnight rate) directly affects Variable rate mortgages… but indirectly, they also affect Fixed Rates.   A better short term indicator to watch is the 5 yr Govt of Cda bond yield.   We watch this to see where fixed rates are headed in the short term… say, over the next few days or or few weeks.   A good long term indicator for Fixed rates is the 2 yr Gov of Cda bond yields.   Financial Experts  pay very close attention to this index if they want to know where rates are going in 6 months or longer.  And at present, the 2 yr yields are very low…..

Bottom line, rates should remain low for some time…   Not so hard to follow, right?

And not to confuse you, but historically, Fixed rates usually go up ahead of Variable rates…. so we need to watch Bond yields together, with the Bank of Canada’s Key Rate to gauge where rates are going…

Hope this helps… and as always, feel free to call or email me…

Steve Garganis

416 224 0114

steve@mortgagenow.ca

Fixed vs Variable in 2011

FIXED RATES MAKE MORE SENSE TODAY.

If you were  in a Variable rate mortgage over the last 2, 3, 5, 10 years or longer….then you paid less interest than someone in a Fixed rate product.   You probably saved $$thousands each and every year.    Variable rate has been lower than the 5 year fixed rate in over 88% of the time.

But how about today….?  Well, the Banks have changed the mortgage landscape.   They have decided there isn’t enough profit in Variable rate mortgages.    Up until 6 months ago, anyone needing a new mortgage could get a Variable rate at Bank Prime (3.00%) less 0.75% and maybe even a little better..!    If you took a Variable rate 4 years ago, you might still be enjoying Prime less 0.90%!!   Today, a quick search on the net for Variable rate pricing and you’ll find Bank Prime less 0%…. some are actually charging Bank Prime + 0.15%.

But it’s not all bad news.   With the bond market hitting all time lows, we are also experiencing historical low 5 year fixed rates.   Today, the best 5 year fixed rate seems to be 3.39%  (WORD OF WARNING… there are some NO FRILLS rates of 3.19% or lower being advertised out there… these NO FRILLS products carry limited or no prepayment privileges and you cannot exit these product without selling your home.   We are not quoting those rates).

Any upward movement in the Bank Prime rate and you could actually be paying more for that Variable rate vs today’s 5 year Fixed rate.   Yes, today we must consider Fixed rate as a good option…. Just make sure you are choosing the appropriate term.   Anything shorter than 3 years does not seem to give enough of a rate guarantee for most of us.  Anything longer than 5 years is too costly.   5 years seems to be a good option in most cases.  But not for all… we are all different and have different needs… speak to a Mortgage Broker to review all available products and decide which one fits you best.

My guess is that Variable rate pricing will continue to be priced at Bank Prime for the next 6 months to 12 months or at least until Bank Prime moves up or until one of the Banks is losing too much market share and wants to attract more business.

We will be watching and reporting.

BMO Economist forecast no rate hikes til 2013

More good news…. interest rates are not expected to increase til 2013, according to Bank of Montreal.

Really no surprise here.  The global economy is not doing well.  But here in Canada, the economy is performing relatively well.   The only reason our stock market and Canadian $ are down is because of the uncertainty of the European debt crisis.

5 year fixed rates are hovering at 3.39%… and they are even lower for qualified borrowers…. Variable rates are at around 2.60%…  We are in record low territory.

Did you know a $300,000 mortgage will carry for as little as $1199/month?   Hey, if you’re paying $1400/mth for rent, then why not consider buying place of your own…  And for those that want off the stock market roller coaster, a rental property may just be what you need…  Best thing is to talk to a Mortgage Broker, crunch the numbers and see how it looks.   It’s probably easier than you think.

Setting us up for fewer rate drops and higher bank profit margins..

It’s becoming clear that the Banks and govt want us to boost Bank profit margins…. Yes, it’s true!   They want you and I to pay a higher interest rate so that the Banks can earn a higher profit

Let’s look at some facts…

-The Banks recently got together and increased their Variable rate pricing from Prime less 0.75% to Prime less 0% (the Bank websites are showing their variable rates at Prime less 0% but there are still places you can get Prime less 0.40%).   So why is that?  They tell us ‘profitability concerns’ is the reason…

-The best 5 year fixed rate on the web from any of the Big Six Banks is 3.99%… Yet, the 5 year govt of Canada bond yields are at 1.43% today…that’s a spread of 2.56%... historically, that spread is between 1.10% to 1.50%… (by the way, you can still get a 5 year fixed rate at 3.39% from reputable lending institutions).   The Banks are making a fortune these days on Fixed Rate mortgages.

– OSFI (Office of the Superintendent of Financial Institutions) has now come out and said that they are concerned consumers will borrower more than they should because interest rates are so low… and because of this, they are urging Banks not to loosen their lending criteria, especially on Home Equity Lines of Credit…

Read the warning signs

If you read between the lines, we are being warned that tighter lending rules could be just around the corner for Secured lines of credit… I don’t think the govt needs to make any further changes to mortgage lending…both secured lines of credit and mortgages…  We have seen several rules changes over the past few years….  But  the message we are being fed is that Banks need to charge a higher rate of interest because consumers cannot be trusted to borrow wisely…

The reality is that interest rates should actually be lower than where they are today.   Cost of funds are down… so why can’t we just let consumers pay fair market interest rates?  It’s one thing to be told that interest rates are going up because of market conditions and cost of funds… but when I start hearing that Bank Profit concerns and consumer spending habits are issues, then I have to start questioning the motives.   This just sounds like another excuse to raise rates and charge the average consumer more…..Consumers beware…!

Some good news

There was some good news… and that is that US interest rates are forecast to remain low into 2013…. Canada usually follow the US very closely….Hey, let’s enjoy the low interest rates…. a $300,000 mortgage will carry from between $1200/mth and $1325/mth…what’s wrong with that?  Enjoy Canada… Enjoy.

Variable rate increases again..

Lenders have begun to raise their Variable rate mortgages again…. The second increase in less than a month.  A look at the Bank websites and you will Variable rate pricing is now at Bank Prime less 0%….  that’s 3.00%…   And although ‘3.00%’ sounds like a good rate, a Variable rate at Bank Prime less 0% is not good.

The Banks have gone from an advertised rate of Prime less 0.65% to Prime less 0% in about one month’s time.   Of course, the best wholesale rates through mortgage brokers now sit at Prime less 0.50% and will probably go to Prime less 0.40% after the dust settles.

So what’s causing the Banks to increase their Variable rate mortgages?   They tell us there are “profitability concerns”.   In simple talk, that means they simply want to increase their profit margins now that rates are expected to stay low for some time to come.   They also want to force us to take the much mortgage profitable 5 year fixed rate mortgage, now sitting at 3.99% (RBC website special rate)..    Keep in mind, there are better rates to be had in the wholesale market…. 3.49% seems to be the best 5 year fixed rate today.

But even 3.49% is too high.  The spread between the 5 year govt of Cda bond (1.45%) and 3.49% is still over 2.00%.   Historically, this spread has been between 1.10% and 1.40%..    It’s simply math…. the Banksters are saying ‘ka-ching, ka-ching”.

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