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Archive for the ‘Interest Rates’ Category

Fixed and Variable – A Definition

Saturday, May 8th, 2010

In this video, I look at what fixed and variable mortgages are as a refresher for past viewers or of my first time buyers.

Transcription of Video Blog:

Hi, everybody. It’s Rowan Smith from the Mortgage Centre.

I want to talk today about fixed or variable. Specifically, I want to define what they are so that when someone is telling you they got a fixed rate at a certain percentage or variable rate at another that you understand what exactly they’re saying so that you can compare apples to apples.

A fixed-rate mortgage is just that. The rate is fixed for the life and the length of your term. If you got a three-year term, and it’s at 3.25, you pay 3.25 throughout the entire term. If it’s a five-year term, and it’s 4.25, you pay 4.25 for the entire term. It does not matter if interest rates go up or go down; your rate is fixed, and your payment is fixed.

A variable-rate mortgage, conversely, is one where the payment fluctuates according to some other interest rate, usually prime rate. Prime rate is dictated by the Bank of Canada and the banks that match or try to follow very closely their prime rate.

Now if you have a prime-rate mortgage, the best available in the market that I have today, it’s prime minus 0.55. Prime rate is 2.25; that means a net rate of 1.7. So 1.7% on a variable versus, say, 4.25 on a five-year fixed. So variable has a substantial savings. However, your payment can and will rise if prime rate goes up.

There are different types of variable. There’s variable capped, where there’s a limit to how high it can go. Before that, you won’t be get getting 1.7. You’ll probably be getting closer to 3% in today’s markets.

You’re going to give up something in terms if you want more security. Whether it be a fixed rate or a fixed payment, you’re going to pay a higher rate.

I’ve seen several ads, and I saw one institution run an ad where what they had was on their whiteboard out front of their institution. It said, “Five years, 1.75.” Of course, clients are calling me saying, “My bank’s advertising 1.75.”

What they don’t put on that sign is it’s a variable. Now you can guarantee that it’s going to be below the fixed rate that I’m quoting if you’re getting a variable rate, because variable rates are generally lower. But they do have that upside risk that your payment could rise.

So there it is: fixed and variable. For the Mortgage Centre, I’m Rowan Smith.

Bank of Canada Hold Prime Rate – Outlook for the Future?

Thursday, October 22nd, 2009

The Bank of Canada announced yesterday that they were holding their overnight rate steady. This means prime rate will remain at the ultra low level of 2.25% for a while yet.

What is more important is the bank’s commentary. They reiterated their commitment to hold rates at the current level until the end of the 2nd quarter in 2010 (July 2010 approximately). This is good news for anyone that opted for a variable rate mortgage in the past few months as they can be assured that their rate will remain at current levels, but will also allow them the right to convert to fixed rates if the fixed rates remain low or fall lower.

I’d like to share with my readers some of the “off the record” commentary I hear from lenders and market insiders.

One of my lenders was in SHOCK at what people were paying for houses in East Vancouver. Almost on cue, the local paper published an article saying that the East Vancouver market was the hottest in BC. While this sounds great, history has shown that by the time the mass media gets hold of what market is “hottest” it’s far too late to consider getting into that market. We’ve seen a massive run up in prices in East Vancouver in the past 4 months, and I would be very conscious of this fact if I were considering buying in this market.

My top realtor referral source and I were having a discussion a few days ago and I was saying that I couldn’t see the market continuing at this meteoric pace upward pace for long because EVENTUALLY there won’t be anyone else willing to pay more than the past buyer. This is the “greater fool” theory of markets, and Garth Turner does a great job blogging about the troubles that are becoming evident in our market. Look him up online. He has an amazing following and I agree with darned near everything he says.

Is this hard evidence that the market is slowing down or turning? No.

It’s purely anecdotal. However, I started hearing these rumblings in May of 2008, and that was just before a MAJOR pullback in the market. This isn’t conclusive evidence that would hold up in court, but it’s just an example of what market insiders are thinking. Again, by the time you hear it on the front page of the Vancouver Sun, you are about 6 months behind the market.

There are several people out there that claim I avoid talking about the “supply side” of the real estate market, and that it is just as important as rate and demand in the market. They are correct in this assumption, and I feel this way because I find that demand is far more prevalent right now in terms of what is determining sale prices of homes. Supply of homes for sale hasn’t vacillated as much as people like to think. The number of prices of sale rises at roughly the rate of population increase. It’s close enough to say that people aren’t RUSHING to sell their homes to get the maximum sale price.

Can deals still be found? Of course.

Will they be in North Vancouver, Coquitlam, Port Moody, or especially, East Vancouver?

My personal opinion is “No.”

If you think buying and flipping (even if you renovate a LOT) is a good financial move, you are assuming a VERY high amount of risk in thismarket. This isn’t a buy and flip market. It is likely a buy and hold market. I’m putting my money where my mouth is, and I’ve bought a property myself (in Langley) that I consider my “dream home.” In other words, I intend to live there for 20+ years, and for this reason, I don’t care what the market does or if I a paying a bit too much because ultimately, I need to have a home, and with the current historically low rates, I can do so and own the home I’ve always wanted.

If you feel similar about a home you are considering buying for your family, then you SHOULD buy and hold on, as real estate prices will always go up in the long term. If you are buying and thinking you’ll upgrade in next 1-2 years, then you should reconsider your purchase.

This is my opinion, and I’m sticking to it.

Please, I beg, someone post a comment.

Why Haven’t Fixed Rates Fallen?

Thursday, July 9th, 2009

As I’ve mentioned countless times on this blog, fixed rates are not tied to variable rates. We all saw fixed rates rise in the past month despite variable rates (prime rate) staying the same. Why? Fixed rates are set based on what banks can get on bonds for similar lengths of time. For example, if the bank can get 3.00% on a fixed 5 year bond, then they will demand 3% + some premium in order to do your mortgage, absorb some risk, and handle inquiries. Therefore, bond yields drive fixed rates.

Here is a graph of bond yields to take note of:

In this image, you will note that bond yields (and fixed rates) had a heck of a run-up, but have pulled back. However, mortgage rates have NOT pulled back. Why?

Some “off the record” discussions with lenders is that no one wants to be the first to drop rates and RE-initiate the rate-war that occurred recently. Also, banks are starting to focus on profit-before-growth instead of just focusing on market share.

Gone are the days of, “buy my friend just go x.xx percent at RBC! Why can’t I get that?” Just like it has in every other facet of finance, your rate will be based on what the risk of your mortgage presents to the various lenders.

Kind of the way it should be, isn’t it?

Fixed or Variable Mortgage? Things to Ask Yourself Before You Decide

Sunday, July 5th, 2009

The question of “fixed or variable” comes up so often I just had to put a post out about it.

There are a number of considerations that need to go into this analysis, and it is different for everyone. The variables I would recommend considering are:

1. How long you are going to be in the home?

2. Is your income fairly stable or does it fluctuate?

3. How tight is your budget using a fixed and variable rate?

4. Will a rising mortgage payment make you lose sleep or stress out?

5. Where are rates headed?

6. Do you follow rates and financial news closely?

HOW LONG ARE YOU GOING TO BE IN THE HOME:

First, most variable rate mortgages are 5 year terms. This means that if you are possibly selling, or refinancing in the 5 year term, then perhaps a shorter term is best. If you are going to be in the home for more than five years, then you can pretty much take whatever form of mortgage best fits your situation based on your answers to the other questions above. As a general rule, if someone is going to be moving in the near future, or thinks that they may want to buy a larger home in the not-too-distant future, then I would take a make a determination partially based on this variable. Sure, if you take a mortgage, any mortgage I offer is “portable” to a new property, but if you need to borrow additional funds, you’d be borrowing them at current rates and taking a “blended” rate based on the rates when you buy/move to a new home.

IS YOUR INCOME FAIRLY STABLE OR DOES IT FLUCTUATE?

If you are on a stable salary, then taking a fixed rate is likely the safest bet as you are going to get a set payment. Taking a variable rate mortgage means your payments could go up (or down) on any given month. If your income is fixed, then this is an argument for a fixed rate. However, the answer to the next question then becomes of paramount importance: how tight is your budget. If your income is variable, or if you are self employed and your income fluctuates wildly, then it seems (to me) to be a recipe for trouble to take a mortgage with a variable payment, and a variable income. If you are really “on top” of your finances, then you can likely make it work. Alternatively, you can use lines of credit or “overdraft protection” to manage your cash flow should there be a particularly lean month. My experience over the last ten years, however, is that in times of rising rates, variable rate mortgages cause a lot of stress and heartache for people who work hourly or suffer from unstable income.

HOW TIGHT IS YOUR BUDGET USING A FIXED AND VARIABLE RATE?

If you look at the payments for a 5 year variable rate (currently 2.65% today) versus a 5 year fixed rate (currently 4.19%) you will, obviously, find the lower variable rate payment attractive. However, if you have to “stretch” or “tighten your belt” or find that the variable rate payment, while possible today, is still high, imagine what would happen if the rates rise? We are at historical lows in rates today. Can you afford it if rates rise by 1% or 2.5% (a VERY common move in interest rates over a 5 year period of time on variable rate mortgages). If you find that you need to take a variable rate to “afford” the payment, then you shouldn’t be taking it. If you can afford to make the same payments as a fixed rate mortgage (just more goes to principal) then you can consider a variable and enjoy the lower rate of interest and higher rate of payment.

WILL A RISING MORTGAGE PAYMENT MAKE YOU LOSE SLEEP OR STRESS OUT?

Some people, and I admit to being one of them, like to know what the monthly cost of living is. I like to know, with certainty, what my monthly bills are going to be so that I budget things out. If my mortgage payment starts to rise (as rates rise) it will stress me out. For this reason, I have chosen peace of mind over interest rate savings. This doesn’t apply to everyone. Some people would rather “let it ride” and take a variable rate as they have historically cost less for borrowers about 95% of the time. However, there is always that 5% when variable rate causes trouble, and the last question we need to ask is possible the most crucial:

WHERE ARE RATES HEADED?

Prime rate (the rate that variable rate mortgages are based) is at the lowest point it has EVER been in Canadian history. These are “emergency rates,” as the Chief Economist for CIBC, Benjamin Tal, has called them. With rates sitting on the floor, there is only really one way for them to go: up. The question is, when will they go up? And how far will they rise? Many people jump to point out that the Bank of Canada has stated they intend to hold rates low until the end of 2010. While this is technically true, there is nothing binding the BOC to do so. If inflation starts to creep up (and it IS creeping up) you can bet that the BOC may change their tune. So, if the difference between 4.19% and 2.65% (fixed versus variable) is 1.54%, by taking a variable you are thinking that prime rate will not rise by 1.54% in the next 5 years, or that if it does, it will stay low long enough for you to reap significant savings.
DO YOU FOLLOW RATES AND FINANCIAL NEWS CLOSELY?

If not, how will you even know when rates rise or fall? For my clients, I keep them all up to date via email with rate updates so they can see the trends for themselves and see what rates are available on conversion. Use your bank, and they don’t care a whit. Use another broker, and I can’t say what their follow up is. Bottom line: if you don’t follow rates frequently, variable poses an added risk as you will only know your rate has risen when your payment is higher (many people fail to even notice that!).


MY PERSONAL TAKE

I think 5 year rates at anything less than 5% is a damn good rate. Period. I prefer fixed rates, but that is just me, and it will differ for everyone. Historically, variable rate mortgages were offered at prime rate or BELOW prime rate. Today it is prime PLUS 0.40% (down recently from prime PLUS 0.80%). This means if you choose variable, you are choosing to lock in that premium for 5 years. If rates start to rise, and banks start to offer prime rate again, you will be still at prime PLUS 0.40% with no hope of getting out.

Lastly, as fixed rates rise independently of variable rates, even though you can convert to a fixed rate at any time, there is no telling what that fixed rate conversion option will give you. Three weeks ago if you were at prime + 0.40% you could swap out to 3.79% at many lenders. Today, it’s around 4.49%. So even with prime rate not moving, the conversion option has trapped a lot of people in variable; hoping that fixed rates will come back down so they can get out – a remote likelihood.

So that’s my take: I prefer fixed rates in this environment with near-record lows. I’ve put my money where my mouth is and locked in my mortgages. However, depending on your answers to the above questions, maybe you think differently and want a variable. Great! I’m happy to help anyone with the process.

Thanks for reading!

Fixed or Variable: The Debate Continues…

Saturday, June 27th, 2009

With fixed rates on mortgages rising, and variable rate mortgages seemingly falling, consumers are often wondering what the best course of action is.

The media has pounded it into people that “variable rates always save you money.” If this was true, why would any stooge be foolish enough to take a fixed term? The answer is that variable rate mortgages OFTEN save you money, but only in times of stable or declining rates. In times of rising rates, variable rate mortgages often cost clients far more.

While interest rates are stable or falling, variable rate mortgages (typically pegged to prime rate) allow clients to ride the downward trend. However, when rates start to rise, so too does their rate.

With prime rate held down to what is, effectively, zero in the eyes of the banks, variable rate mortgages only have one way to go from here: up.

People taking fixed rates are, today, able to lock in these historically low “emergency” mortgage rates for 5 to 10 years, and take on absolutely NO risk of upward rate movement. People taking variable rate mortgages are doing so at historically high premiums. Historically, variable rate mortgages were offered at or below prime rate. With prime so low, and profit margins eroded, banks are now offering variable rates at prime PLUS some amount. A client taking a variable rate today will get lower rates in the short term, but when rates begin to rise (and if and when variable rates start to be offered at or below prime again) the variable client will be paying far more than anyone else for their variable money.

If we imagine that prime returned to a more “natural” 5% in the next two years, that means that varaible clients would be paying 5.4% when new clients may be able to get below 5%.

Now, many proponets of variable mortgages cite the “transferrability” option as the saving grace: that you can transfer to a fixed term at any point in the term. While this is great in theory, human nature being what it is, people often fail to transfer when they should and miss the boat.

For example, if prime rate is 2.25% and you have a prime + 0.40% rate (5 year term) for a net rate of 2.65% and the best fixed 5 year rate is 4.04% then you may thing that the 2.65% is a great deal! Fast foward a year and a half and you hear that prime rate is going up. You call your broker, and ask for the best 5 year rate and are shocked to hear that the best rate is 4.75%!

How could this happen? Because fixed rates and prime rate are not tied, and are, in fact, based on entirely different market forces. Fixed rates can (and have just recently) risen while variable rates have remained stable.

Bottom line: unless you follow interest rates and financial news on a daily basis, you likely aren’t going to be well enough informed to know when to lock in, or what the rates are at any given point. You can’t count on your bank or lender to advise you either, as they are ultimately only in this for the profit. If upward moving rates and higher payments scare you, if your budget is tight, or if you don’t follow financial news very often, take a fixed rate. If you none of those apply, then you can roll the dice on a variable.

However, my personal feeling is that taking a variable today is like buying Nortel at $200 per share and thinking that it would go higher and higher and higher still. It, like rates today, only had one way to go…

Fixed or Variable? My Argument AGAINST Variable Rates!

Tuesday, May 26th, 2009

Not a day goes by that I don’t get an inquiry from an applicant asking me: “What is best? Fixed? Variable? Open? Closed?”

I want to address this with you, because the “variable is best” mantra chanted by many brokers has been accepted as gospel truth by clients and realtors alike. However, there have been several points in time when variable is NOT best. For example, when rates are at the bottom of a rate cycle (right now). This is just like there are times when having bought Nortel stock would have been a bad thing (at the top).

Here is my analysis of variable rates, and the risks they presently pose:

Over the past 8-10 years, closed variable rate mortgages were available at AT LEAST at prime rate, but usually discounted below prime anywhere from prime – 0.25% to prime – 1.00% depending on applicant strength and lender policy. This has been the historical trend.

With prime at an all time low of 2.25%, the best discount in the market (as of today) is prime + 0.40%. Note that this is not a discount. It is, in fact, prime PLUS 0.40%. Variable rates are offered at a premium over prime in this market. Not three weeks ago, it was prime + 0.80% at most major banks. So the trend is that variable rate premiums are falling.

So, with the knowledge that in the last 12-18 months we’ve seen prime MINUS 0.90% go to prime PLUS 0.40% today, what is the best choice?

If a client takes a prime PLUS product in this market, they are stuck at a premium over prime rate, even if prime rate rises. With prime basically sitting on the basement floor, how much further can it fall? The Bank of Canada has indicated that prime will remain low until the end of the 2nd Quarter in 2010 (after the Olympics). With only upside in sight, it seems that a fixed 1 year term (convertible at any point into a longer term) is the way to go. This gives the client a guaranteed 1 year at the low rate of 2.90% with the protection that they can switch out to a fixed rate at any point in time.

“But variable rates are also convertible to fixed rates!” is the most common cry to my argument.

True, but there is nothing forcing the Bank of Canada to keep rates pinned down this low. Not two months ago they were talking about rate increases to stem what was the first signs of inflation, then a new set of economic data came out, and now they are talking about holding them low until 2nd quarter of 2010. The moral of this story is that economic indicators, like the weather, change frequently. A new piece of news could come out at any point in time indicating inflation is on the rise, and the Bank of Canada may increase prime rate despite their current claim of holding them low until 2010. Nothing is forcing them to hold rates low.

Lastly, the “conversion option” on variable mortgages is never as good as it sounds. I can get a client 3.59% today at a major lender in a 5 year fixed product, but the best rate that you can “convert” to from a variable is 3.89% (most banks it is 3.95% or higher). Clearly, the banks are taking bit of a profit when you convert and only offering their lowest rates to drive new business in the doors. True, the 1 year convertible faces this same problem, but you get a year’s worth of security for your trouble.

If you opt for a variable product today, where does this leave you

Stuck in a 5 year variable product, at a PREMIUM over prime rate (when historically they should be below prime rate and the premiums are currently falling) and your only option is to convert out to fixed rates that are very much higher than what is available in the market for a purchaser today.

My advice:

If you are a long term thinker, who likes a fixed budget, these 5 year rates are UNPRECEDENTED in Canadian history. Take a 5 year fixed rate, and you’ll be loving your security for the next 5 years. This is what I did on my personal mortgages.

If you don’t mind (or can afford) a bit of variability in your budget, take a 1 year term with convertibility rights (not all lenders offer this, so speak to me about solutions for your clients). Then you get a fixed low rate for at least 1 year, and can convert out to a longer term if you get a sniff that rates are on the rise.

If you have any questions or comments, or would like to know how to take advantage of these 1 year fixed rate convertible offers, don’t hesitate to contact me me at smith.rowan@mortgagecentre.com or 604-657-6775 (my cell). I make myself available to realtors and clients 7 days a week from 9am to 9pm or longer if necessary.

Bank of Canada Lowers Prime Rate – Best Rates in Canada

Wednesday, April 22nd, 2009

So, despite the majority opinion that the Bank of Canada would not lower rates, they did! With the key lending rate now at 0.25% (down from 0.50%) the major banks immediately followed suit by lowering their prime rate to 2.25%. When I last checked, every major bank had lowered prime, and the rest were following as well.

While this news is shocking, the fact that the Bank of Canada has revised its economic outlook from a 1.5% contraction to a 3% contraction is the result of this change. With the overall prices in the market falling, and the economy shrinking, the Bank of Canada has indicated they will follow this low-rate policy through until the 2nd quarter of 2010. This is likely a sign that the ultra-low rates we are seeing currently, are here to stay, for the time being…

The reason for this change in outlook is the result of the global recession deepening (this should come as no shock, I figure), and prices of nearly everything being driven down due to soft demand and wary consumers.

Published below is the Bank of Canada’s official press release regarding the rate decrease. This was published today, April 21st, by the Bank of Canada.

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Bank of Canada lowers overnight rate target by 1/4 percentage point to 1/4 per cent and, conditional on the inflation outlook, commits to hold current policy rate until the end of the second quarter of 2010

OTTAWA – The Bank of Canada today announced that it is lowering its target for the overnight rate by one-quarter of a percentage point to 1/4 per cent, which the Bank judges to be the effective lower bound for that rate. The Bank Rate is correspondingly lowered to 1/2 per cent. The deposit rate – the rate paid on deposits held by financial institutions at the Bank of Canada – is left unchanged at 1/4 per cent and provides the floor for the overnight rate. Details of the Bank’s operating framework at the effective lower bound can be found here.

In an environment of continued high uncertainty, the global recession has intensified and become more synchronous since the Bank’s January Monetary Policy Report Update, with weaker-than-expected activity in all major economies. Deteriorating credit conditions have spread quickly through trade, financial, and confidence channels. While more aggressive monetary and fiscal policy actions are underway across the G20, measures to stabilize the global financial system have taken longer than expected to enact. As a result, the recession in Canada will be deeper than anticipated, with the economy projected to contract by 3.0 per cent in 2009. The Bank now expects the recovery to be delayed until the fourth quarter and to be more gradual. The economy is projected to grow by 2.5 per cent in 2010 and 4.7 per cent in 2011, and to reach its production capacity in the third quarter of 2011. Given significant restructuring in a number of sectors, potential growth has been revised down. The recovery will be importantly supported by the Bank’s accommodative monetary stance.

The Bank expects core inflation to diminish through 2009, gradually returning to the 2 per cent target in the third quarter of 2011 as aggregate supply and demand return to balance. Total CPI inflation is expected to trough at -0.8 per cent in the third quarter of 2009 and return to target in the third quarter of 2011. While the underlying macroeconomic risks to the projection are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection are tilted slightly to the downside.

With monetary policy now operating at the effective lower bound for the overnight policy rate, it is appropriate to provide more explicit guidance than is usual regarding its future path so as to influence rates at longer maturities. Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target. The Bank will continue to provide such guidance in its scheduled interest rate announcements as long as the overnight rate is at the effective lower bound.

To reinforce its conditional commitment to maintain the overnight rate at 1/4 per cent, the Bank will roll over a portion of its existing stock of one- and three-month term Purchase and Resale Agreements (PRAs) into six- and twelve-month terms at minimum and maximum bid rates that correspond to the target rate and the Bank Rate, respectively. These longer-term PRAs will be issued according to the schedule released today.

Today’s decision to lower the policy rate by 25 basis points brings the cumulative monetary policy easing to 425 basis points since December 2007. It is the Bank’s judgment that this cumulative easing, together with the conditional commitment, is the appropriate policy stance to move the economy back to full production capacity and to achieve the 2 per cent inflation target. The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework to be outlined in the Bank’s Monetary Policy Report on 23 April.

Information note:

The next scheduled date for announcing the overnight rate target is 4 June 2009.

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Lower Rates in the Future? Apparently it IS Possible!

Saturday, April 18th, 2009

I get asked every day if I think rates are rising, falling, or going to hold steady. Frankly, I don’t buy a lot of the opinions from experts. I prefer, instead, to look at where inflation is, what the Bank of Canada’s stance is on inflation, and make some inferences from there. Not a month ago, inflation had spiked, and the Bank of Canada was holding fast on their interest rates. Now, inflation has slowed, and the Bank of Canada has been given some room to drop rates further (yes, it is technically possible).

This article was written by Julian Beltrame, of the Canadian Press and is being reproduced in full with full credit to her for the work. This is just a republishing of the article, but it does indicate we may see more rate cuts in the future. All I can say is, WOW.

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Inflation is falling again, giving Bank of Canada governor Mark Carney a free hand to take the central bank’s trend-setting interest rate down another notch next week to an unprecedented low.

Consumer prices were up 1.2 per cent last month over a year ago, below expectations that the inflation rate would remain at 1.4 per cent, as cheaper gasoline and cars outduelled rising food and shelter costs.

The slower pace of overall increases tallied by Statistics Canada maintains a trend that began last summer when oil prices began receding from their historic peak and the global recession took hold.

Economists predict the headline inflation rate will soon tumble into negative territory as year-over-year comparisons take account of last spring and summer’s soaring fuel costs.

“The energy-price discrepancy between the spring and summer of 2008 and our forecasted levels point to a headline rate moving below zero,” commented Royal Bank economist Dawn Desjardins.

However, this does not necessarily mean that Canadians need to fret about deflation – a devastating downward move in general price levels that would ravage asset values, discourage consumption and slash production.

“I don’t think we have to worry about deflation,” said Benjamin Reitzes of BMO Capital Markets.

“Unless core prices go negative, deflation will not be a problem in Canada.”

Canada has reached a “sweet spot” with few worries of either high inflation or deflation, suggested Meny Grauman, a CIBC World Markets economist.
Friday’s report showed core prices, excluding volatile items such as energy and fresh vegetables, holding at the Bank of Canada’s target of two per cent.
Given the weak economy and low inflation, a C.D. Howe Institute panel of economists is recommending that the Bank of Canada cut its overnight rate – already at a record low – by a quarter percentage point on Tuesday to 0.25 per cent.

The think-tank said a strong majority in its 10-economist survey favoured so-called quantitative easing – the central bank adding to the money supply by buying assets from the commercial banks – in order to put “additional cash in the hands of private financial institutions to promote further growth in the monetary base.”
Carney will unveil options for quantitative and credit easing on Thursday.

The Statistics Canada report shows food is now the main driver of inflation, up 7.9 per cent from a year earlier, the steepest increase in over 22 years.
This escalation included some startling numbers: potatoes popping 54.9 per cent, fresh vegetables 26.5 per cent, fresh fruit 19.3 per cent, non-alcoholic beverages 10.2 per cent, cereal products 11 per cent and meat 7.6 per cent dearer than a year earlier.

Shelter costs rose 2.1 per cent last month, a slower rate of increase than in February.

The most important factor pushing the inflation rate lower remains gasoline prices, which were slightly higher in March than in February but were 21 per cent lower than a year ago.

Excluding gasoline, inflation would have been double at 2.4 per cent in March, the agency said.
Prices for other fuels fell 32.9 per cent, and transportation costs were down 6.2 per cent in March. The cost of purchasing or leasing a passenger vehicle dropped 7.4 per cent.

On a month-to-month basis, consumer prices edged up a modest 0.2 per cent, after rising 0.7 per cent in February.
The agency said the inflation rate slowed in all provinces except the two most populous, rising to 1.8 per cent in Ontario from 1.5 per cent the previous month, and holding steady at 0.8 per cent in Quebec.

Here’s what happened in the provinces and territories. (Previous month in brackets):

-Newfoundland and Labrador 0.5 (0.9)
-Prince Edward Island -0.2 (1.0)
-Nova Scotia 0.0 (0.4)
-New Brunswick 0.2 (0.3)
-Quebec 0.8 (0.8)
-Ontario 1.8 (1.5)
-Manitoba 1.1 (1.7)
-Saskatchewan 1.8 (2.6)
-Alberta 0.9 (2.1)
-British Columbia 1.1 (1.5)
-Whitehorse, Yukon 2.3 (3.3)
-Yellowknife, N.W.T. 0.9 (2.0)
-Iqaluit, Nunavut 3.9 (3.1)

The agency also released rates for major cities, but cautioned that figures may fluctuate widely because they are based on small statistical samples (Previous month in brackets):

-St. John’s, N.L., 1.1 (1.3)
-Charlottetown-Summerside, 0.2 (1.2)
-Halifax, 0.2 (0.2)
-Saint John, N.B., 0.3 (0.4)
-Quebec, 1.0 (0.8)
-Montreal 1.1 (1.0)
-Ottawa 2.1 (1.8)
-Toronto 2.1 (1.7)
-Thunder Bay, Ont., 1.9 (1.9)
-Winnipeg, 1.1 (1.7)
-Regina 2.6 (3.3)
-Saskatoon 1.6 (2.4)
-Edmonton 1.2 (2.4)
-Calgary 1.1 (2.4)
-Vancouver 1.3 (1.6)
-Victoria 1.1 (1.5)

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Mortgage Insurer Changes Rules. The Winds of Change are Blowing Hard!

Thursday, April 16th, 2009

There are presently 3 mortgage insurers in Canada: CMHC (Canada Mortgage and Housing Corporation), Genworth, and AIG. Many lenders have stopped using AIG and Genworth in the past few months as they do not have 100% guarantees to the lenders in the event of loss on a mortgage. However, the private mortgages insurers: Genworth and AIG have really driven the entire industry in terms of what debt service ratios, credit standards, and property standards are acceptable in order for banks to offer fully discounted rates.

With AIG on the ropes (in my opinion) and being offered by only a handful of lenders, Genworth recently changed their guidelines to reflect a more conservative stance on mortgage financing in Canada.

Effective April 18th, 2008 Genworth will have the following guidelines:

The changes will affect new borrowers with less than 20% equity/down-payment.

Among other things, Genworth is reportedly:
• Discontinuing its high-ratio rental and Credit Assist programs.

• Lowering its maximum TDS guideline from 44% to 42% for all products

• Increasing credit score requirements for its Cash-Out Refinance program, from:
o 650 to 700 (for 90.01-95% LTV applications)
o 600 to 660 (for 85.01-90% LTV applications)

• Imposing new credit score minimums for high-rise (4+ floors) condominiums of:
o 700 (for 90.01-95% LTV applications)
o 660 (for 85.01-90% LTV applications)
Genworth did not previously have credit score minimums specific to high-rise condos.

• Increasing credit score requirements for its Business For Self (Alt. A) product, from:
o 650 to 700 (for 85.01%-90% LTV applications)
o 650 to 680 (for 80.01%-85% LTV applications)
o Genworth is eliminating LTV’s over 90% (previously it allowed BFS applicants to borrow up to 95% LTV)

Genworth said it will accept applications for the above programs (under the old guidelines) until April 17.
Collectively, these are significant changes for Genworth. The rationale for the changes has not been freely spoken-of by Genworth at this time. However, if CMHC keeps it’s own guidelines as-is, Genworth will likely lose additional market share to the country’s number one insurer (CMHC). This has been a trend in effect for the past year and a half, regardless.

So, the market tightens further. Will prices continue downwards, despite more market activity? It’s anyone’s guess at this point.

Can Interest Rates Go Any Lower?

Wednesday, April 15th, 2009

There was an article published by Bloomberg on April 14th whereby the author, Sean B. Pasternak, made the point that rates are very likely at the bottom of their cycle. With many of my clients wanting a variable rate mortgage to “take advantage of the low interest rates for the next couple years,” I felt it prudent to take a step back and look at this market and rate environment in terms of historical comparison, for I don’t believe we are going to see two years of rates at this level.

In physics, when laser is pointed down towards a mirror at 30 degrees, the resulting reflection bounces back at the same angle: 30 degrees. In markets, especially financial markets this is often (but not always) the case with trends. The rapid decrease in rates in the past year is likely, but not guaranteed, to result in an equally rapid rise when the market comes out of recession. Rates have fallen from a high of around 5.90% a year ago to around 3.85% today. That is a change of 2.05% or a drop in around 35% in interest rates.

To put that in comparison, the same house with a mortgage of the same amount, (say, $500,000) would have had a payment of $2,810 last year, but can now be had with payments of only $2,160. That is a drop in the amount of $650 per month for no reason other than the economic conditions in the interest rate market.

In other words, affordability is back, but is it here to stay?

Back to my comparison to physics: the things will rebound on the same angle or trajectory as they initially arrived. With that logic, we may see a rapid increase in rates in the future as there are already signs of an economic turn around just barely underway.

My point? Taking a variable rate at Prime + 0.80% (the average market rate) results in a 5 year variable rate of 3.30% versus a fixed rate of 3.85%. This is a difference of 0.55% and most borrowers look at this number and get excited that they will be saving money. However, the last interest rate drop of 0.50% happened very fast, and could go in the opposite direction equally as fast. In fact, if inflation rears its head, we could see a move of more that 50 basis points (0.50%) occur rapidly wiping out all the savings of a variable rate mortgage, but none of the inherent risk.

Prime rate at the banks follows the Bank of Canada’s lending rate to the banks. With the benchmark rate set at 0.50% how much further can variable rates descent? I would suggest that they can’t, and that taking a variable rate in these times is akin to buying Nortel at the peak and hoping that it could go higher still. It isn’t likely.

With that in mind, why take the risk on a variable rate, hoping and praying that rates will fall, when fixed rates are at their historic lows? I have put my money where my mouth is and locked my own mortgages into fixed rates as I think these are rare times that are soon to disappear.

Some food for thought….

The article, published in its entirety is below:

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Mortgage rates in Canada, which have plunged by almost 50 percent in the last year, aren’t likely to fall further, said Phil Soper, chief executive officer of Brookfield Real Estate Services Fund.

“Certainly with the Bank of Canada’s target rate set at virtually zero, there’s very little room,” Soper said today at a conference in Toronto on Canada’s real estate market. The rate is “the lowest it’s been in anyone in this room’s lifetime.”

Rates for home loans have been dropping during the biggest financial crisis since the Great Depression, with some lenders offering mortgages approaching 4 percent, Soper said. That compares with an average posted five-year rate of 7.5 percent a year ago, according to the Bank of Canada. He added that home prices in Canada aren’t likely to rise “sharply” over the next two years.

Bank of Montreal, which sponsored the conference, lowered its rate for a five-year fixed-rate mortgage this month to 4.15 percent.

“We are approaching almost zero interest rates,” at the Bank of Canada, said John Turner, the Toronto-based bank’s director of mortgages. “The question becomes, how much upward pressure will there be as we come out of this recession?”

The Bank of Canada last month cut its benchmark lending rate to 0.5 percent, its lowest ever, and said it’s preparing to use policies beyond interest rate moves to revive an economy hit by a recession and tight credit markets. The next rate announcement is April 21.

Canadian existing home sales rose in February for the first time since September as buyers took advantage of lower mortgage rates and prices, according to the Canadian Real Estate Association’s Multiple Listing Service. Sales of existing homes rose 8.6 percent from January to 28,669 units.

Bank of Montreal senior economist Sal Guatieri predicted that Canada’s housing market will decline further this year, without the “crash” experienced in the U.S.

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