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What Every Canadian Borrower Needs To Know About Fixed-Rate Mortgage Penalties (April 27, 2015)

by Dave Larock

Mortgage Rate ConceptLast week was a relatively calm one for mortgage rates so today, I will interrupt our regularly scheduled interest-rate commentary to update a very important subject I covered in an earlier post on how fixed-rate mortgage penalties are calculated.

This often overlooked detail can, and often does, have a huge impact on your overall borrowing cost and unsurprisingly, the lenders who charge the highest penalties haven’t been going out of their way to warn you about them. As you will see, there is a reason that the small print is small. 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 Bank of Canada’s Latest Economic Commentary Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (April 20, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week as expected and it also released its Monetary Policy Report (MPR). This is an important document for anyone keeping an eye on Canadian mortgage rates because it provides us with the Bank’s views on the state of our economy and includes projections for both foreign and domestic economic momentum over the next several years.

Here are five highlights from the latest MPR commentary on the state of the Canadian economy:

  • The Bank did not seem overly concerned about the spike in our core inflation rate to 2.4% in March, attributing this rise to the temporary “pass-through effects of the lower Canadian dollar and some sector specific factors.” Most importantly, the BoC expects that both our overall inflation and our core-inflation rates will trend toward its 2% target “on a sustainable basis” as our output gap closes “around the end of 2016”. (As a reminder, the output gap is the difference between our actual output and our maximum potential output. Interest rates would normally be expected to rise at or about the time when the output gap closes.)
  • The Bank now believes that the negative impact of lower oil prices on our economy was “more front-loaded” than it had originally predicted, but that “the total drag associated with the decline is expected to be about the same” as originally forecast. Somewhat more ominously, the BoC warned that “the full impact of the decline in oil prices has yet to show up in the employment statistics” and that there will be “important downside risks to oil prices” for the remainder of 2015.
  • The Bank recognized that the “temporary weakening in the U.S. economy early in the year” has slowed its hoped-for virtuous cycle, where our cheaper dollar fuels a rise in export demand, which triggers an increase in business investment, which then improves employment opportunities. That said, the latest MPR noted that “capacity pressures were more prevalent among export oriented firms” and that it expects improving U.S. economic growth will help re-establish this “natural sequence” by mid-2015, although with more support coming from rising export demand and less from an improvement in business investment. (The BoC “expects investment in the oil and gas sector to fall by about 30 per cent in 2015”, while investment outside of the oil and gas sector “is expected to increase by about 7 per cent per year, on average.”)
  • The Bank believes that its decision to cut its overnight rate by 0.25% in January “should help mitigate financial pressures in the household sector by cushioning the decline in income and employment caused by lower oil prices”. This seems like a stretch to me. Borrowing rates were already at near-record lows and banks passed only a partial 0.15% of that 0.25% rate discount to consumers, thus providing only a minimal offset to the more acutely felt impact of job losses and reductions in hours worked.
  • The Bank continued to believe that “a soft landing in the housing sector” is the “most likely scenario, although it believes that “elevated house prices and debt levels relative to income continue to leave households vulnerable”. More specifically, it highlighted “the adverse impact of the oil price shock in Alberta and continued robust price growth in Toronto and Vancouver” as its areas of most concern. That reads to me like a nudge to Federal Finance Minister Joe Oliver to consider another round of rules changes for mortgage underwriting, which have become a rite of spring in recent years.

Here are the highlights from the MPR’s commentary on the state of the world’s largest economies: 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 Will The Latest Employment Data Affect Canadian Mortgage Rates? Monday Morning Interest Rate Update (April 13, 2015)

by Dave Larock

Mortgage Rate ConceptLast Friday we received the latest Canadian employment report, for March, and it showed that our economy grew by 28,700 new jobs last month.

This was an upside surprise when compared to the consensus economist estimate of “no change” for the month, although the details of the report were mixed: 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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Were Last Week’s Canadian GDP Data “Atrocious” Or Not? Monday Morning Interest Rate Update (April 6, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest Canadian Gross Domestic Product (GDP) data for January, and economists breathed a sigh of relief when the numbers showed a decline of only 0.1% for the month.

Market watchers had braced for the worst after Bank of Canada (BoC) Governor Poloz warned that growth in the first quarter of 2015 would look “atrocious” thanks to the unfolding oil-price shock. Since Central bankers are not known for hyperbole, when they use a strong adjective, markets take notice. (Merriam Webster’s online dictionary defines the word atrocious as “of very poor quality …  appalling … horrifying”.)

The question that followed the GDP data release was why Governor Poloz used such a strong descriptor to preface the release of a not-so-bad 0.1% GDP decline.

To start with, let’s look at a quick summary of the key concerns raised by Governor Poloz in that widely quoted interview in the Financial Post, which took place on March 30, 2015: 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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Running Instead of Writing – Monday Morning Interest Rate Update (March 30, 2015)

by Dave Larock

Mortgage Rate ConceptThis post will be shorter than normal because, instead of blogging yesterday, I participated in the 121st running of the 30k Around the Bay Road Race in Hamilton, Ontario. This is the fifth year in a row that I have run this race, and with good weather and cheering crowds I managed to run a personal best. (My wife keeps reminding me that an update to the running section of this blog is long overdue!)

Five-year Government of Canada (GoC) bond yields rose by eight basis points last week, closing at 0.80% on Friday. Five-year fixed-rate mortgages are offered in the 2.54% to 2.64% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.69%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.

The Bottom Line: GoC bond yields continue to hover near record lows and the Bank of Canada remains cautious about our economic outlook. Both factors suggest that our fixed and variable rates will 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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The Real Reason the U.S. Fed Is No Longer Going To Be “Patient” About Raising Its Policy Rate – Monday Morning Interest Rate Update (March 23, 2015)

by Dave Larock

Mortgage Rate ConceptLast Wednesday the U.S. Federal Reserve finally gave the markets what they had been nervously waiting for by removing the key word “patient” from its interest-rate policy guidance, but in my opinion, not for the reason that had long been expected.

Before we break down the Fed’s latest comments and I explain why I write that, let’s quickly review why what the Fed says matters to Canadian mortgage borrowers.

Canadian monetary policy is heavily influenced by U.S. monetary policy because our economies are deeply interlinked (we export about 80% of what we sell abroad into U.S. markets), because the U.S. economy is about ten times larger than ours, and because the Fed funds rate is essentially the global economy’s single most important interest rate (which I recently wrote about here).

There is always a delicate balance between the relative monetary policy positions of the Bank of Canada (BoC) and the U.S. Fed, and even subtle changes in our respective outlooks can influence the U.S/Canada exchange rate, which has its own profound impact on our economic momentum.

The most recent Canadian example of this phenomenon was seen when BoC Governor Poloz expressed repeated concerns about the negative impacts of sharply lower oil prices on the Canadian economy. His comments helped drive the Loonie lower, giving our exporters a competitive boost in the process.

Last week it was the Fed’s turn, as it offered markets its latest perspective on the strength of the U.S. recovery. Each Fed statement is carefully parsed by investors, who try to determine when it will finally begin to raise the funds rate from its current 0% to 0.25% range, where it has hovered since December 16, 2008. The funds rate is important because it acts as the base rate on which all other U.S. interest rates are either directly or indirectly based, so when it rises, almost all other U.S. rates would be expected to follow (along with rates in many other countries as well).

Investors have long expected that the Fed would first remove the word “patient” from its interest-rate guidance as an early-warning signal that its policy rate would begin to rise in the not-too-distant future. That expectation is based on precedent because in January of 2004, the Fed dropped the word “patient” from its forecast and then hiked its funds rate six months later.

Interestingly, the Fed did finally do exactly that last week. But in an unexpected twist, the tone of its overall communication was actually more cautious. So while the momentum of the stock and bond markets in the lead up to the Fed’s announcement last Wednesday was bearish, consistent with the removal of the word “patient” from its guidance, markets were quickly re-priced with a lower-for-longer interest-rate view immediately following the Fed’s actual announcement. Markets quickly lowered the odds of a September rate hike from 53% to 38%, and decreased the odds of a rate hike by year end from 77% to 64%.

Here are the key points from the Fed’s official statement along with the highlights from its latest U.S. economic forecast: 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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Happy March Break – Monday Morning Interest Rate Update (March 16, 2015)

by Dave Larock

Mortgage Rate ConceptThanks to a weekend filled with March Break family activities, today’s post will be short and sweet.

Five-year Government of Canada bond yields fell by sixteen basis points last week, closing at 0.84% on Friday. Five-year fixed-rate mortgages are offered in the 2.59% to 2.69% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.74%.

Five-year variable-rate mortgages are available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you.

The Bottom Line: My overall view of our economic tea leaves remains unchanged. I continue to believe that our fixed and variable-rate mortgages are likely to remain at or near today’s ultra-low levels 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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Bank of Canada Governor Poloz Keeps the Market on Its Toes – Monday Morning Interest Rate Update (March 9, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week, surprising some who expected that it would be lowered again after January’s emergency cut. Instead, the Bank judged the existing degree of monetary-policy stimulus as being “still appropriate” under the current circumstances.

While most observers expected the BoC to stand pat, there was still some uncertainty around what it would do, and I think that was by design. The BoC decided to drop its forward guidance last year, preferring to restore a bit more of an air of mystery to its decision-making process. This approach keeps the market guessing and prevents speculators from getting too complacent or aggressive when betting on the future of Canadian interest rates and exchange rates. For example, when the BoC dropped its overnight rate in January, investors didn’t see it coming and the rate cut pushed both the Loonie and our bond yields quickly and decisively lower, creating maximum impact.

This time the market was ready for a BoC rate cut. And this time, we didn’t get it. 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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Who is Buying Government Bonds at These Microscopic Yield Levels? Monday Morning Interest Rate Update (March 2, 2015)

by Dave Larock

Mortgage Rate ConceptWe live in strange times. Today, five-year Government of Canada (GoC) bond yields are lower, at 0.72%, than the Bank of Canada’s overnight rate, at 0.75%. In other words, you now earn less yield if you lend your money to our government for five years than banks earn by lending money to each other overnight.

This odd phenomenon matters to Canadian fixed-rate mortgage borrowers because their rates are priced on GoC bond yields. If the supply/demand balance that is helping to keep these yields at ultra-low levels stays relatively constant, today’s ultra-low mortgage rates are likely to remain in place for some time. But that raises an important question, which is being posed with increasing frequency around the world: Who is buying government bonds at these levels and why? The answer is important because understanding where today’s demand is coming from will help us evaluate the likelihood that it will continue. 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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Will the U.S. Federal Reserve Finally Raise Its Policy Rate, and What Impact Will That Prospect Have on Canadian Mortgage Rates? Monday Morning Interest Rate Update (February 23, 2015)

by Dave Larock

Mortgage Rate ConceptThe hot question surrounding bond yields and mortgage rates these days is whether the U.S. Federal Reserve is going to raise its short-term policy rate, called the “funds rate”, later this year.

The Fed funds rate is essentially the most important interest rate in the global economy. In normal times, it provides the Fed with its most effective monetary policy tool for controlling U.S. inflation and growth rates because it serves as the base rate on which all other U.S. interest rates are priced, either directly or indirectly. In extreme circumstances quantitative easing (QE) can have a greater short-term impact over U.S. interest rates, but QE is only used as a temporary, emergency measure.

Thus, the Fed funds rate has a profound influence over the U.S. economy, which is the world’s largest. Given that bond yield movements in many other countries have a high correlation with U.S. bond yield movements, any change in the Fed funds rate initiates a cascading impact that permeates throughout the global economy. This impact is keenly felt in Canada, where our Government of Canada (GoC) bond yields have moved in lock step with their equivalent U.S. treasury yields since the start of the Great Recession, and this is why anyone keeping an eye on Canadian fixed mortgage rates should keep a watchful eye on the Fed’s policy guidance.

Now on to the question of the day: Will the Fed finally raise its policy rate for the first time since 2006? 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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Happy Family Day – Tuesday Morning Interest Rate Update (February 17, 2014)

by Dave Larock

Mortgage Rate ConceptHappy Family Day to my readers.

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

Five-year Government of Canada bond yields fell by five basis points last week, closing at 0.73% on Friday. Five-year fixed-rate mortgages are offered in the 2.69% to 2.59% range, and five-year fixed-rate pre-approvals are available at rates as low as 2.79%.

Five-year variable-rate mortgages are still available in the prime minus 0.65% to prime minus 0.80% range, depending on the terms and conditions that are important to you. (As a reminder, the prime rate recently fell to 2.85%.)

The Bottom Line: There is little to suggest that our fixed and variable-mortgage rates will head higher any time soon. As such, rates should remain at or below their current levels 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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How Will the Latest Canadian and U.S. Employment Data Affect Canadian Mortgage Rates? Monday Morning Interest Rate Update (February 9, 2015)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest Canadian and U.S. employment reports, and in today’s post I’ll provide the highlights and offer my take on the impact that this new data may have on Canadian mortgage rates.

The Canadian Labour Force Survey for January

  • Our economy added a total of 35,400 new jobs in January.
  • We lost 11,800 full-time jobs during the month and added 47,200 part-time jobs, which makes the headline number a little less exciting. That said, we saw strong gains in full-time employment over the prior four months and large losses in part-time employment over the prior two months, so these short-term reversals in momentum may just indicate some month-to-month normalization in both categories.
  • Almost all of the gains were in the self-employed category, which added 41,100 new positions, as compared to private sector employment, which added only 1,100 new jobs, and public sector employment, which shed 6,700 jobs. This is a concerning trend because when we see a rise in self-employment that corresponds with otherwise weak job-growth momentum, past experience suggests that these newly self-employed workers are really just in the midst of a job transition.
  • Somewhat surprisingly, Alberta had a strong month for employment growth, adding 13,700 new jobs in January. That said, it is only a matter of time before the negative impacts from the recent sharp drop in oil prices show up in the province’s employment data, so this momentum is not expected to last.
  • On a more positive note, average hourly wages rose by 0.5% in January, and have now risen by 2.0% on a year-over-year basis. When compared to our current inflation rate of 1.5%, as measured by the Consumer Price Index (CPI), this rise in average wages means that workers are seeing an increase in their purchasing power. If this trend holds, it should fuel a rise in consumer spending that would act as a tailwind, albeit a small one, for our lagging growth momentum.

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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Lower Mortgage Rates on the Horizon? Here’s Why That Could Happen – Monday Morning Interest Rate Update (February 2, 2015)

by Dave Larock

Mortgage Rate ConceptGovernment of Canada (GoC) bond yields continued their free fall last week, with the most recent plunge being fuelled by a disappointing GDP release from Statistics Canada on Friday.

The latest GDP data estimated that our economy contracted by 0.2% in November. The impact of sharply lower oil prices was evident in the detail, which showed a 1.5% decline in the sector defined as mining, quarrying, and oil and gas extraction. When we remember that a barrel of West Texas Intermediate (WTI) oil was selling for $75 in November and that that same barrel now sells for closer to $45 today, it is easier to understand why the BoC felt that an emergency rate cut was in order (even if our major banks didn’t entirely agree). 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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My Five Key Mortgage-Rate Questions in Response to the Bank of Canada’s Surprise Overnight Rate Cut – Monday Morning Interest Rate Update (January 26, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) shocked markets last Wednesday when it dropped its overnight rate by 0.25% as a defensive response to sharply lower oil prices.

In its accompanying statement the Bank said that there is “considerable uncertainty” about how the oil-price shock will affect the strength of our recovery. The most immediate impacts are expected to be negative, as oil-patch investment dries up and our import purchasing power weakens. The longer term benefits of a strengthening U.S. economy and a weaker Loonie will take longer to accrue, and are thus less certain.

Against this backdrop, setting monetary policy is a daunting challenge. The BoC must make adjustments today based on assumptions about how the economy will look in the future, but with so much interplay between many complex variables, this decision-making process necessarily involves a mix of both art and science.

The BoC said it believes that “the oil price shock increases both downside risks to the inflation profile and financial stability risks”, and the Bank now expects that our economy will take until “around the end of 2016” to return to full capacity, which is later than it had previously forecast. Its rate cut is being used as a way to “provide insurance against these risks”.

The market’s initial response was as one would expect. Both the Loonie and our bond yields moved sharply lower as investors priced in a slower growth forecast for our economy as well as a more benign inflation outlook.

Normally when the BoC drops its overnight rate our major banks respond by dropping their prime rates, which our variable mortgage rates are priced on, but that didn’t happen this time. Instead, TD bank announced that it would not drop its prime rate and the other major banks quietly followed its lead. Interestingly, Rob Carrick at the Globe and Mail reported that TD did cut the rate that it pays on its investment savings account from 1.25% to 1.00%, thereby padding its margin by .25%. This proves yet again that it is better to invest in the Big Six banks than to borrow from them.

The decision by the major banks not to pass on the BoC’s rate cut raises five key questions: 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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Canadian Mortgage Rates May Be Headed Even Lower – Monday Morning Interest Rate Update (January 19, 2015)

by Dave Larock

Mortgage Rate ConceptThere is widespread speculation that the European Central Bank (ECB) will launch its own version of full blown quantitative easing (QE) on Thursday of this week, and if that happens, it will have a direct impact on Canadian mortgage rates.

You may find it hard to believe that yet another central bank will double down on the belief that the problem of too much debt can be solved by adding a lot more of it. But ECB President Mario Draghi has few alternatives left at this point, and to quote Bernard Baruch, “If all you have is a hammer, everything starts to look like a nail.” Besides, President Draghi has yet to make good on the promise he made in July 2012 to do “whatever it takes” to preserve the euro, which he followed with his best Clint Eastwood impersonation by adding, “Believe me, it will be enough.” 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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