This week, TD Economics said the Bank of Canada probably won’t raise rates til 2012. How quickly things can change. Just a few months ago, most Economists and Financial Experts were calling for the Bank of Canada to raise rates this summer.. some said as early as May… Well, that didn’t happen.
There are many reasons but TD’s Chief Economist, Craig Alexander, said it was low inflationary expectations, the negative impact on the European financial instability (Greece, Ireland, Spain, Portugal) and the high $Canadian dollar. We can also through in Japan’s Tsunami and the Middle East political uprising.
Fixed rates have also not gone up as the Economists were forecasting earlier this year. Instead, they have come back down to historical lows, once again… The Bond market affects fixed rates and we’ve seen the 5 year Canadian Bond drop 80 basis points since mid April.
All this is great news for borrowers as there appears to be little pressure to raise interest rates anytime soon.
Found this article interesting….
Canada is the envy of the world when it comes to our mortgage and banking regulations. This article in the Huffington Post questions why is there a 30 year fixed rate mortgage term and points to Canada’s mortgage and banking system as a better, more viable option.
In case you didn’t know, 30 year fixed rate terms are the norm in the U.S. 5 year Variable rate mortgages are the more common mortgage product around the world, including Canada. 200 U.S. Banks have failed since 2008… NONE in Canada… and in 1985, almost 3,000 U.S. banks failed but only 2 Canadian Banks closed their doors....
Go ahead Canada, feel good about yourselves…!
This morning marked the fourth of eight scheduled meetings for 2011 by the Bank of Canada. No surprises, the BOC left the rate unchanged. This keeps the Bank Prime rate at 3.00% and keeps those Variable rate mortgages well under 3.00%. Great news for borrowers.
In their press release, the BOC noted concerns about the high Canadian $dollar… increasing the BOC rate would probably mean an even higher $CAD, putting more pressure on Canada’s exports. The $CAD is currently $1.02US. Still, the BOC is concerned about inflation and keeping inflation within the Target Zone of between 1.00% and 3.00% has always been one of the biggest factors that drive BOC policies. “…inflation expectations remain well-anchored.”
The next BOC meeting is July 19… right now, it does not appear as though we will see any hikes until September or later…
A funny thing happened on our way to higher interest rates…. They did an about face and went down.
The bond market drives fixed rates… and the 5 year Govt of Canada bond market has come down around 50bps in the last month… So far, we have seen lenders reduce fixed rates by around 30bps… We are seeing 5 yr fixed rates in the 3.89% from some better lenders… and we could see a few more drops.
But we are also seeing some very interesting programs for cashback deals that are worth a look at….there is a 5 year fixed rate at 4.29% with a 2% cashback.. this one is worth looking at as it puts some cash in your pocket and gives you a good rate…
Fixed rates are good for those that don’t want to worry about rates going up or down and don’t mind paying a little more for the security of fixed payment. But we can’t ignore the lower variable rate mortgages… still hovering around 2.25%…
Earlier this year, most Economists and Experts believed the Bank of Canada was going to raise the rate at their next regular meeting on May 31st.. but with weak economic data coming out of the U.S., Europe and even Canada, most now believe the Bank of Canada won’t move until September or even next year in January.
Historically, Variable rate has outperformed Fixed rates…the product choice depends your risk tolerance, goals and objectives….
This week, we saw two major mortgage lenders raise their Variable rate pricing from Prime less 0.75% to Prime less 0.65% and Prime less 0.50%…
This is really quite unexpected…. We cannot ignore what is happening… The explanation given for the prices changes is ‘profitability concerns’. But the cost of Variable Rate funds hasn’t really changed. We believe there are a few other possible explanations.
First, we are seeing more borrowers flock to Variable rate mortgages again…. With a 2.20% difference between a 5 year fixed rate and a Variable rate, it’s been much easier to choose to Variable. Banks make more money on 5 year fixed rate mortgages and would rather push you into these products…. And yet another reason is the possible gains in the recent polls by the NDP.
According to this article in the Globe and Mail, we should brace ourselves for more costly mortgages if the NDP keeps moving in the polls. Here’s a quote from the article that says it well, “This interest rate premium on social democratic governments is unfair and tragic. But dismissing it is unrealistic.”
We don’t normally get involved in politics on this site… not unless it can affect mortgage rates, the housing market or the economy…One of the more infamous examples was in 1995 during the Quebec Referendum. Does anyone remember that?
Just before the referendum, a new poll had suggested that Quebecers’ could win a majority vote to separate. This sent the Canadian stock market and the Canadian dollar plunging. You might also remember that the Bank of Canada rate jumped 1.00% over night along with mortgage rates. It’s the single biggest increase that we have ever seen. It forced many of us to lock into a 5 year fixed rate… (something the Banks loved as the 5 year fixed rate product is the most profitable).
I’m not saying this will happen again but there was a report in The National Post that says BMO put out a warning to investors that things could be shaky if Jack Layton and the NDP continue to gain ground in the polls.
Another recent development this week is that a few major Lenders have increased their rates on new Variable rate mortgages. We have seen them go from Prime less 0.75% to Prime less 0.50%. They say it’s due to profitability pressures…. but I wonder if has more to do with the election next week?
Last week, the Bank of Canada (BOC) kept it’s Target Rate unchanged for the 4th consecutive meeting. That’s means Bank Prime is still 3.00%. Many Experts and Economists think the next rate hike will come as early as April or as late as June….
But not all Economists agree. Scotiabank’s economists say the rate will remain unchanged til October. They give a detailed explanation as outlined in this National Post article... but the main reasons are:
- high $Canadian Dollar (an increase by BOC usually increases the $CAD)
- global uncertainty… the middle east turmoil and European debt worries
- tougher financing rules including the new mortgage rules
- U.S. Fed not expected to raise their rate til next year…any increase by the BOC would push the $CAD even higher and make our exports even more expensive
- possible Federal election in Canada coming soon.. and provincial elections this year… history tells us that rates are usually flat during election time.
The Scotiabank economist make a good argument. I like the political reason… History shows us politics play a big role in the BOC actions…. Enjoy the low rates… They seem to be here for a while.
Happy New Year! Wishing you all the best in 2011….
Here’s the Bank of Canada’s schedule for key interest rate announcements in 2011.
January 18, March 1, April 12, May 31, July 19, September 7, October 25, December 6.
The Bank meets eight times a year to set the Target Interest rate. This rate directly affects the Bank Prime rate and Variable rate mortgages. It also affects Fixed rate mortgage indirectly.
Historically, the Bank adjusts this rate up and down between 2 and 3 times a year. In 2010, we had 3 rate increases of 0.25% each after a full 12 months of no changes. And most experts were forecasting for even greater rate hikes… This all changed when the economic recovery stumbled in many parts of the world, raising fears of a double dip recession.
Even today, there is still uncertainty about the economy in many parts of Europe and the U.S. At home, in Canada, we seem to be doing well….not great, but okay.
This uncertainty is delaying the expected interest rate hikes that so many experts were calling for in 2010…. Best guess now is for rates to remain stable until April or even July.
Enjoy the low rates…!
Today was the last of eight regularly scheduled meetings by the Bank of Canada (BOC). The BOC didn’t raise their Target rate.. no surprise here. With uncertain economic data in the U.S., Ireland and even a little shaky news in Canada, there was no chance of a rate hike.
It’s widely believed that Governor Mark Carney will not raise the rate until March 2011 at the earliest, or maybe even May 2011… possibly later… read more here.
One thing is for certain, the longer things remain uncertain, the longer we will be enjoying these record low rates… Variable rate mortgages can be had at 2.25% and a 5 year fixed is around 3.69%. Borrow wisely…
Here are some interesting stats…
-A Variable rate mortgage outperforms a fixed rate mortgage in over 88% of the time… According the Milevsky study done earlier this decade and updated in 2008….
-Variable rate mortgages have been at least 1.00% lower than the 5 year fixed rate mortgage over the past 25 years….and on occasion, better by as much as 2.00%.
-Canadians move every 3 years on average…meaning they must either refinance their mortgage or pay it out.
-a Variable rate mortgage has a fixed penalty of 3 months interest.
-a 5 year fixed rate mortgage has a penalty that is at least 3 months interest but has no limit…. and in the past 18 months, we have seen penalties of 6, 10 and even 14 months worth of interest.
-yet, 66% of Canadians have a 5 year fixed rate mortgage…
Is the 5 year fixed rate mortgage really the right product for 66% of Canadians? Can the 5 year fixed rate mortgage be the right product for everyone? Which mortgage product do you think your bank wants you to choose?
By the way, can you guess which mortgage product is the most profitable?…. you guessed it.. the 5 year fixed rate.
Make sure your Mortgage Broker does a needs analysis before they recommend a mortgage product for you…. There is no ‘one size fits all’ when it comes to mortgages…. Ask yourself, ‘who is this mortgage best for’…. my bank or me?
Latest figures show inflation jumped 2.4% in October according to Statistics Canada… compared with 1.9% in September. The Bank of Canada aims for an inflation rate of between 1% and 3%. Anything over 2% can trigger the Bank of Canada to take action… Usually, a hike in the Bank of Canada Rate, which affects Variable Rate Mortgages..
However, it’s no reason to panic. A one month inflation spike probably isn’t enough for the Bank of Canada (BOC) to take drastic action. It’s probably gonna take consecutive months of higher inflation or other events before the BOC raise rates again. Most experts believe the Bank of Canada will not make any changes til next year.
Throw in some Global issues like Ireland’s’ debt and the Korean conflict heating up and you get uncertainty… Uncertainty means rates should stay low for some time…
Bank of Canada governor, Mark Carney, held the Target Rate steady today…as expected… Concerns about the U.S. economic recovery stalling, the Global economy and our own domestic economy were mentioned in the Press Release.
In the press release, the Bank said inflation was not a concern as it is under the 2% target. Take all this data and it spells UNCERTAINTY.
What’s also interesting is that the Bank has adjusted it’s forecast for growth downward for the next 2 years…Great news for those in a Variable rate… Variable rates are hovering around 2.30% these days.
This makes the Variable Rate product that much more attractive…even with 5 year fixed rates in the 3.59% range.
Experts believe the rate will remain steady throughout next Spring and possibly into Fall depending on inflation and Global and domestic economic data….
Click here for the Press Release.