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…!