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A Big Week Ahead For the Canadian Mortgage Market – Monday Morning Interest Rate Update (April 14, 2014)

by Dave Larock

Mortgage Rate ConceptThis is an important week in the mortgage world because our federal banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), is expected to release a draft of its B21 guidelines which will amend, and most likely tighten, the underwriting guidelines used by Canada’s big three high-ratio mortgage insurers.

There is concern within the real-estate industry that the four rounds of mortgage rule changes that have already been made have not yet had time to fully work their way into our real-estate markets. The fear is that more rule tightening in the meantime may turn the regulatory screws too tight, causing a sharp slowdown in housing activity that cannot easily be reversed.

Our policy makers would argue that our real-estate markets have held up well in the face of the first four rounds of changes and that ultra-low interest rates are still fuelling house-price increases, which will become unsustainable without further tightening. Raising interest rates to bring our largest real-estate markets off the boil would damage our broader economic momentum, whereas tightening our high-ratio mortgage rules provides a more targeted solution. If you’re going to conduct surgery on part of our economy, goes the thinking, better to use a scalpel instead of a chainsaw.    read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Latest Canadian and U.S. Employment Data Mean for Our Mortgage Rates – Monday Morning Interest Rate Update (April 7, 2014)

by Dave Larock

Mortgage Rate ConceptAnyone keeping an eye on where mortgage rates are headed should pay close attention to the monthly Canadian and U.S. employment reports because the cost of labour is one of the main drivers of overall inflation. Bond yields, and by association mortgage rates, move in response to changes in expectations of future inflation.

The employment data have even greater importance today because the U.S. Federal Reserve has linked both the timing of its quantitative easing (QE) tapering and the timing of its next short-term policy rate increases to the U.S. labour market’s return to health. Any changes in U.S. interest rates have a direct impact on Canadian rates because our monetary policies are tightly linked.

We received the latest Canadian and U.S. employment data (for March) last Friday and today’s post provides highlights from both. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why Not All 2.99% Five-Year Fixed-Rate Offers Are Created Equal – Monday Morning Interest Rate Update (March 31, 2014)

by Dave Larock

Mortgage Rate ConceptI usually refrain from dealing with specific product offerings in the market but I have had so many questions from my clients and potential clients about the Bank of Montreal’s (BMO’s) newly announced  Low-Rate Mortgage at 2.99% that I have decided to make an exception.

In today’s post, I will evaluate the BMO offer in detail and compare it to several other options that are currently available in the market. We’ll start off with the interest rate itself before shining a light on the terms and conditions that accompany BMO’s headline grabbing Low-Rate Mortgage product. Then you can decide for yourself whether the trade-offs are worth it. 

That Sexy 2.99% Rate

Nothing sets a mortgage borrower’s heart aflutter these days like seeing a five-year fixed rate that starts with a 2 handle. While not every lender has the advertising and PR muscle of a Big Five bank, you can find other sub-3% rates without having to give up the flexibility that BMO has removed as part of its glitzy offer. In fact, I currently offer fully featured five-year fixed-rate mortgages at 2.99% with two different lenders that are much more flexible, and if you’re willing to accept the kind of terms and conditions that are included in the BMO offer, my best no-frills five-year fixed rates range from 2.84% to 2.89%, depending on the size of your down payment. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Governor Poloz’s Big Reveal and Fed Chair Yellen’s Test Balloon – Monday Morning Interest Rate Update (March 24, 2014)

by Dave Larock

Mortgage Rate ConceptLast week we heard new economic commentary from both Bank of Canada (BoC) Governor Stephen Poloz and U.S. Federal Reserve Chair Janet Yellen. Today’s post will summarize what they said and draw out the implications for both fixed and variable mortgage rates.

On Tuesday, BoC Governor Poloz offered a candid assessment of Canada’s current economic prospects when he spoke to the Halifax Chamber of Commerce. Here are my key takeaways from what he said: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Why I Don’t Agree With BMO’s Forecast That Fixed Rates Will Now Outperform Variable Rates – Monday Morning Interest Rate Update (March 17, 2014)

by Dave Larock

Mortgage Rate ConceptLast week two Bank of Montreal (BMO) economists, Douglas Porter and Benjamin Reitzes, issued a report on mortgage rates arguing that “the fixed rate option now looks superior” to equivalent variable-rate alternatives.

I read this report with interest because I write about what’s happening with rates on a regular basis and my clients invariably ask for my take on the fixed versus variable debate at some point during their mortgage application process.

In today’s post I will examine the arguments that these economists used in reaching their conclusion, and offer my take on their findings:

Assumption #1:  “The U.S. economy [is] poised to accelerate.”

The BMO economists’ main argument in favour of fixed rates centres around “the improving outlook for the North American economy” and particularly the belief that “the U.S. economy [is] poised to accelerate.”

The consensus has certainly become much more bullish about the strength of the U.S. economic recovery of late, and we have started to see more encouraging economic data, but I have not yet come around to this evolving view for the following reasons:

  • The U.S. economic recovery has been underpinned with massive quantitative easing (QE) programs which the U.S. Fed is now trying to withdraw. While the U.S.’s fragile economic momentum has survived the first two rounds of QE tapering, the real bite from the Fed’s withdrawal has not yet been felt. (I wrote about this coming challenge in detail in this recent post.) I think that the Fed will draw back their tapering if/when it causes U.S. bond yields to rise materially, and if that happens, the consensus estimates of the Fed’s tapering timetable will prove optimistic. Since the Fed has repeatedly said that it will not even think about raising rates until well after QE has been completely unwound, future hikes in U.S. short-term rates might not occur until well after mid-2015, as is widely predicted.
  • The U.S. employment market is healing slowly but let’s not forget this is partly because the U.S. participation rate is near all-time lows and U.S. unemployment and disability payments are near record highs. Recent signs are encouraging but it will still be some time before overall U.S. employment growth meaningfully buoys middle class incomes. Since U.S. consumers account for about two-thirds of overall U.S. GDP, this has to happen before real, sustainable economic momentum can be achieved.
  • The most recent uptick in U.S. economic momentum (Q4, 2013) has coincided with the largest increase in U.S. consumer credit since the third quarter of 2007. I would feel much more confident about an upswing in U.S. economic momentum that was fueled by rising incomes, rather than by increased borrowing rates.
  • The impacts of the U.S. fiscal squeeze have not yet been fully felt and several of the experts I read think that last year’s federal budget cuts will continue to create headwinds for U.S. economic momentum well into the future.
  • The U.S.’s rapidly aging baby-boom population will force its federal government to deal with the crippling cost of its entitlement programs while also addressing the rising threat of massively under-funded pension programs in the near future. These cans can’t be kicked down the road for much longer.

Interestingly, just about every prediction about rates heading higher over the last several years has started with the fundamental assumption that the U.S. economy was about to enter full blown recovery mode. So far that hasn’t happened, and those predictions have been proven wrong more than once. While Messrs. Porter and Reitzes may certainly end up being right about the U.S. economy achieving escape velocity in the near future, I remain sceptical for the reasons listed above. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How the Latest Canadian and U.S. Employment Data Are Likely to Impact Our Mortgage Rates – Monday Morning Interest Rate Update (March 10, 2014)

by Dave Larock

Mortgage Rate ConceptThe latest Canadian and U.S. employment numbers were released last Friday and they painted two distinct pictures of the current economic momentum in each country.

First, a quick recap. If you’re keeping an eye on mortgage rates, the Canadian and U.S. employment data matter because employment rates affect the cost of labour, which is one of the most important determinants of inflation, and inflation, in turn, is one of the most significant determinants of mortgage rates.

If labour markets are tight, the cost of labour rises and it doesn’t usually take long before prices, and mortgage rates, follow. Conversely, if labour markets are loose and there is an abundant supply of unused labour, increases in wages are moderated and an economy should be able to grow for some time without pushing up costs and rates. Each new labour report helps us calibrate where we currently stand on this spectrum.  read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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All About CMHC’s Mortgage-Insurance Premium Changes – Monday Morning Interest Rate Update (March 3, 2014)

by Dave Larock

Last Friday Canada Mortgage and Housing Corporation (CMHC) announced that it will increase its mortgage-default insurance premiums, effective May 1, 2014. Current premiums will remain in effect on all mortgage applications that are submitted before this date, even in cases where the transaction closes well after the changeover deadline.

Bluntly put, the impact on the average borrower will be negligible.

To highlight what the typical impact of this change might look like with an example, let’s assume that a borrower is purchasing a $400,000 property with a $40,000 down payment, that the property will be used as his/her principal residence, and that he/she can qualify for financing using traditional underwriting guidelines:

  • This deal has a loan-to-value of 90%, which means that our borrower’s high-ratio insurance premium will rise from 2.00% to 2.40% after May 1.
  • In dollar terms, that extra 0.40% premium will increase the cost of insuring this borrower’s $360,000 mortgage from $7,200 to $8,640.
  • If our borrower chooses to roll the default-insurance premium into the mortgage balance, as almost all borrowers do, the monthly payment on his/her five-year fixed-rate mortgage with a 25-year amortization and a rate of 3.09% would be increased by $6.88/month.

The chart below summarizes all of the coming changes to CMHC’s insurance premiums:

CMHC Fee Changes Chart 2

Here are five key points of note relating to this announcement: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Latest Consumer Price Index Means for Mortgage Rates – Monday Morning Interest Rate Update (February 24, 2014)

by Dave Larock

Mortgage Rate ConceptLast Friday Statistics Canada released its latest Consumer Price Index (CPI), which shows that prices have now increased by an average of 1.5% over the most recent twelve months.

The latest CPI result came in higher than the 1.2% increase we saw in December and higher too than the 1.3% increase the consensus was expecting for the month of January, but it was still well below the Bank of Canada (BoC) target rate of 2%. Meanwhile, core inflation, which strips out the CPI’s more volatile inputs like food and energy prices, rose by 1.4% (up from 1.3% in December).

Interestingly, seven of the eight major price components that make up the CPI rose in January, with shelter (+2.1), transportation (+2.0%), and food costs (+1.1%) leading the way.

This CPI uptick was welcome news for our central bank. The BoC has grown increasingly concerned about our rate of inflation because it has languished below the Bank’s target rate for more than two years now, essentially because there is too much slack in our economy.

The BoC recently indicated that it would consider lowering its overnight rate in an effort to help bring our excess economic capacity back online, but this would only be done as a last resort. The Bank is still concerned about our household borrowing rates, which have slowed recently but might reaccelerate in response to a rate cut.

Thus far, the Bank has been able to use a change in the language it uses to lower expectations on the timing of future rate increases, and this has helped push the Loonie lower against the Greenback. A cheaper Loonie helps stimulate our economy in many of the same ways that a BoC rate cut would, only in a more narrowly targeted way and to a lesser overall degree. Think of the falling Loonie as a form of ‘rate-cut lite’.

Timing is the BoC’s biggest challenge now, as it often is. The Bank is hoping that the positive effects of the cheaper Loonie will permeate through our economy before continued disinflation translates into outright deflation. (As a reminder, disinflation is a reduction in the rate at which average prices are rising, while deflation happens when average prices are actually falling.)

We don’t want to make too much of one month’s CPI report, but an acceleration in our average prices last month may be an early signal that our average inflation rate is coming off the bottom.

While it may sound counterintuitive that a central bank charged with maintaining price stability would be relieved to see an increase in average prices, price stability is a two-sided coin. Falling prices must be monitored with the same caution as rising prices, and the latter have been of greater concern to the BoC for some time now.

Five-year Government of Canada (GoC) bond yields rose by four basis points last week, closing at 1.69% on Friday. Borrowers who are putting down at least 20% on the purchase of a new home should be able to find a five-year fixed rate in the 3.09% range and borrowers who are putting down less than 20% can now find five-year fixed rates for as low as 3.04% (albeit with more limited terms and conditions and the added cost of high-ratio mortgage insurance).

Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%.

The Bottom Line: Our January CPI report showed that average prices rose by 1.5% over the past month. This development further diminishes the slim chance that the BoC will cut its overnight rate any time soon, but neither should it materially increase the likelihood that the Bank will raise our short-term borrowing rates any time in the near future.

 

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Happy Family Day – Tuesday Morning Interest Rate Update (February 18, 2014)

by Dave Larock

Mortgage Rate ConceptHappy Family Day!

I used the holiday yesterday for its stated purpose so today’s post will be short and sweet.

Five-year Government of Canada (GoC) bond yields rose by five basis points last week, closing at 1.65% on Friday. Borrowers who are putting down at least 20% on the purchase of a new home should be able to find a five-year fixed rate in the 3.14% range and borrowers who are putting down less than 20% can now find five-year fixed rates for as low as 3.04% (albeit with more limited terms and conditions).

Five-year variable-rate mortgages are offered at rates as low as prime minus 0.65%, which works out to 2.35% using today’s prime rate of 3.00%. The mortgage qualifying rate (MQR), which is used to underwrite variable-rate mortgage applications, fell ten basis points and is now set at 5.24%. (Here is a post I wrote that explains how the MQR works in detail.)

The Bottom Line: GoC bond yields went up a little last week but not with enough conviction to put upward pressure on our fixed-rate mortgages. Meanwhile there were no new Canadian or U.S. economic data releases last week that would cause me to alter my long-standing view that variable-mortgage rates should stay low for the foreseeable future.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will Mortgage Rates Be Impacted By the Latest Canadian and U.S. Employment Reports? Monday Morning Interest Rate Update (February 10, 2014)

by Dave Larock

Mortgage Rate ConceptThe latest Canadian and U.S. employment reports were released last week and both were mixed.

Canadian employment rose by 29,400 jobs, recovering a good chunk of the 46,000 jobs we lost in December. Looking at the longer-term trend, we see that our economy has now created an average of 15,000 new jobs per month over the most recent six months, which is fewer than the 20,000 new jobs per month that we need just to keep pace with our population growth.

Here are the other highlights from the most recent report, with my take on each one: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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How Canadian Mortgage Rates Are Impacted by Continued U.S. Fed Tapering – Monday Morning Interest Rate Update (February 3, 2014)

by Dave Larock

Mortgage Rate ConceptThe U.S. Federal Reserve continued to taper its quantitative easing (QE) programs last week, announcing on Wednesday that it would reduce them from $75 billion/month to $65 billion/month.

This matters to Canadian mortgage borrowers for several reasons:

  • U.S. and Canadian monetary policies are tightly linked, making it highly unlikely that the Bank of Canada (BoC) will raise its overnight rate at least until the U.S. Fed hikes its equivalent Federal funds rate. Since the U.S. Fed has repeatedly said that it will not even consider raising the Fed funds rate until it has completely unwound its QE programs, the timing of this withdrawal acts as a kind of distant-early-warning system for Canadian variable-rate borrowers.
  • The U.S. Fed taper is expected to strengthen the U.S. dollar and if the Loonie continues to depreciate against the Greenback, this will provide additional stimulus for our economy, particularly for our export-based manufacturers (which I wrote about last week).
  • The taper’s impact on our economy goes beyond monetary policy and exchange rates. For example, if QE is allowed to continue for too long it could fuel higher-than-expected U.S. inflation, which we would inevitably import over time. This would force the BoC to raise its overnight rate in response. Alternatively, if the withdrawal of QE pushes U.S. bond yields up, Government of Canada (GoC) bond yields, which move in lock step with their U.S. counterparts, would move higher and trigger a rise in our fixed-mortgage rates.

Here are the highlights from the Fed’s press release that included the most recent tapering announcement: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Loonie Rides to the Rescue – Monday Morning Interest Rate Update (January 27, 2014)

by Dave Larock

Mortgage Rate ConceptAll hail the falling Loonie!

Queue the Lone Ranger theme song

It has been a tough last few months for the Canadian economy. We have seen our trade deficit rise to unsustainable levels; our employment market has continued its slow bleed; and Canadian consumers, whose resilient demand helped pull us through the worst of the Great Recession, appear increasingly tapped out.

These trends have been unfolding for some time, going as far back as when Mark Carney was the Bank of Canada (BoC) governor. His solution was to implore businesses to use their cash-rich balance sheets to invest in productivity enhancements and capacity expansion. To which they universally replied, “After you.” read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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The Primary (and Hidden) Risk to U.S. Inflation? Morning Interest Rate Update (January 20, 2014)

by Dave Larock

Mortgage Rate ConceptThe U.S. labour force participation rate just hit its lowest level in thirty-five years, dropping to 62.8% in December. (As a reminder, the U.S. participation rate measures the percentage of working age Americans who are either employed or who are actively looking for work.)

There is an ongoing debate about whether or not this labour force withdrawal is caused by cyclical or structural factors, and the answer to this question has direct implications for Canadian mortgage rates.

If the U.S. participation rate is dropping because of cyclical factors, then this trend will reverse when there is  acceleration in U.S. economic momentum. The U.S. Fed believes this to be the case, and as such, it is using aggressive monetary policy stimulus to try to fuel economic growth and spur the U.S. participation rate higher.

If the U.S. participation rate is dropping because of structural factors, however, this means that the decline is being primarily driven by long-term changes in the labour force, for example, by shifting demographics and by a growing mismatch between the skills that businesses need and those that the labour force can supply. A structural shrinking of the U.S. labour pool would be far less susceptible to changes in the U.S. business cycle and far less prone to influence from Fed policy. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What The Latest Employment Report Means for Mortgage Rates – Monday Morning Interest Rate Update (January 13, 2014)

by Dave Larock

Mortgage Rate ConceptCanadian bond yields fell sharply last Friday when Statistics Canada released its latest employment data  for December.  Our economy shed 46,000 jobs last month, all of them full time.

This number was well below the 14,000 new jobs that economists were expecting and it pushes our unemployment rate from 6.9% to 7.2%, heightening fears that our economic momentum is stalling out.

We shouldn’t assign too much significance to one month’s employment report because these data are volatile and are often revised in subsequent months, but Canada’s job creation engine has been slowing for some time now. We averaged only 8,500 new jobs/month in 2013, well below our 2012 average of approximately 25,000 new jobs/month, and worse still, not even close to the 20,000 new jobs/month that our economy needs just to keep pace with our population growth.

When these latest employment data are viewed strictly from a mortgage-rate perspective, this bad news is actually good news. If our economic momentum continues to slow, the Bank of Canada (BoC) will be less likely to raise its overnight rate, which our variable-rate mortgages are priced on. In fact, if things get much worse there is growing speculation that the BoC may actually consider lowering its overnight rate instead. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Tapering But Not Tightening – Monday Morning Interest Rate Update (January 6, 2014)

by Dave Larock

Mortgage Rate ConceptWhen the Fed announced on December 18, 2013 that it would begin tapering its quantitative easing (QE) programs by $10 billion/month starting in January, financial markets seemed to breathe a sigh of relief. To the surprise of many, the S&P actually rallied on the news.

In reality, the Fed had no choice. QE has reached the point where it may well be doing more harm than good (and some would argue that it passed that point a long time ago). Instead of bolstering market confidence, QE was heightening fear on many levels.

Here are some examples of how this has been happening: read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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