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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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Shovelling and Shopping – Monday Morning Interest Rate Update (December 16, 2013)

by Dave Larock

Mortgage Rate ConceptLast week was a slow one for news relating to Canadian mortgage rates, which was a welcome respite for those who were busy with shovelling and shopping.

Government of Canada (GoC) five-year bond yields were two basis points higher last week, closing at 1.81% on Friday. Market five-year fixed rates are available in the 3.35% range and there are lower rates available to strong borrowers who have deals closing within the next 30 days and in some cases, with mortgage contracts that come with more limited terms and conditions. As usual, it pays to do your homework.

Variable rates are currently offered in the prime minus 0.55% range, which works out to 2.45% using today’s prime rate of 3.00%. The Bank of Canada recently softened its view on when it may raise its overnight rate, on which our variable rates are based, and investors are now pricing in the possibility of a rate cut in the BoC’s future. While that seems unlikely in the current environment, my recent fixed- versus variable-rate simulation shows that there are significant potential savings inherent in today’s variable rates, rate cut or not.

The Bottom Line: There has been increased speculation that the U.S. Fed may taper its quantitative easing (QE) programs in the near future. If this happens, and I’m still not convinced that it will, I think the Fed will try to aggressively counteract any sharp rise in bond yields that follows. Given the 90%+ correlation between U.S. and Canadian bond yields over the last several years, that should keep  our fixed-mortgage rates relatively unchanged  well in to the new year, and our variable rates at today’s ultra-low levels for much longer than that.

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 BoC Jaw Bones the Loonie Down – Monday Morning Interest Rate Update (December 9, 2013)

by Dave Larock

Mortgage Rate ConceptLast week the Bank of Canada (BoC) announced that it would once again hold its overnight rate at 1%, as was universally expected. But in a somewhat surprising move, the Bank significantly altered the language in its accompanying commentary.

Here are the key phrases from the BoC’s latest statement with my comments in italics: 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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Fixed Versus Variable Rate Simulation: The Winner Is … Monday Morning Interest Rate Update (December 2, 2013)

by Dave Larock

Mortgage Rate ConceptIt’s time to revisit the question that everyone loves to ask: Is it better to go with a fixed- or variable-rate mortgage today?

While we all crave certainty, especially when making important financial decisions, there is no one-size-fits-all answer to this question.

For starters, there are important qualitative factors to consider when choosing one option over the other. For example, if you’re more likely to lose sleep at night worrying that your mortgage payments will increase, you should go with a fixed rate. If you’ll lose sleep worrying that you’re paying too much interest, a variable rate is probably the way to go. Simply put, you can’t put a price on peace of mind.

Once these individual factors are accounted for, just about every borrower I work with asks for my view of where rates may be headed over the next several years. While my crystal ball is as murky as ever, I am happy to explain how various factors influence the future direction of our mortgage rates, and to offer my take on what these tea leaves are currently telling us. (While adding the caveat that the only thing my opinion and $2.00 will guarantee them is a hot cup of coffee!)

In today’s post I’ll try to put a stake in the ground and create a base-case estimate of where mortgage rates may be headed over the next five years (while trying to err on the conservative side.) I’ll then use that estimate to run a variable-rate simulation that will allow you to compare the relative costs of a five-year fixed-rate versus a five-year variable-rate mortgage. 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 Quantitative Easing Should Make Canadian Mortgage Borrowers Nervous – Monday Morning Interest Rate Update (November 25, 2013)

by Dave Larock

Mortgage Rate ConceptMost of us understand intuitively that you can’t solve a debt crisis by creating more debt any more than you can cure alcoholism by drinking more alcohol. That’s why the U.S. Fed’s quantitative easing (QE) programs make so many of us nervous, even as QE continues to push stock prices higher and interest rates lower. The more I learn about this subject, the clearer it becomes that we are living on borrowed time (pun fully intended).

That is the fundamental challenge that I now grapple with on a weekly basis when writing about the factors around the world that influence Canadian mortgage rates. Of all of these outside forces, there is no doubt that QE is the proverbial elephant in the room.

On the one hand, QE (along with the Fed’s dovish forward interest-rate guidance) make it highly likely that our mortgage rates, especially our variable-mortgage rates, will stay at today’s ultra-low levels for the foreseeable future. On the other hand, these low rates are a direct result of unprecedented monetary expansion by the U.S. Fed that has produced few of its intended benefits while perpetuating massive but as-yet-unquantified costs for future generations.

This quote pretty well sums it up: “Never in our history has so much money been spent to produce so little good, and the full bill for this failed policy has yet to arrive. No such explosion of debt has ever escaped a day of reckoning and no such monetary surge has ever had a happy ending.” – Phil Gramm and Thomas R. Saving via The Wall Street Journal, November 21, 2013.

Queue the ominous-sounding music. 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 October’s Strong Employment Data May Not Matter to the Fed – Monday Morning Interest Rate Update (November 11, 2013)

by Dave Larock

Mortgage Rate ConceptMarket watchers were surprised last Friday when the initial U.S. and Canadian employment data for October came in stronger than expected, and bond yields rose on the news.

In today’s post I’ll summarize the latest employment reports, but more importantly, I’ll explain the implications of an obscure Fed research paper that was also published last week. This report suggests that U.S. employment data will have to climb much higher than markets are expecting before the Fed will consider altering its monetary 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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Is the U.S. Fed Making the Unthinkable Inevitable? Monday Morning Interest Rate Update (November 4, 2013)

by Dave Larock

Mortgage Rate ConceptWhen the U.S. Federal Reserve met last week, it did as markets expected and decided to continue buying $85 billion of newly issued U.S. Treasury debt each month.

To put that number in perspective, the Fed is now buying almost all of the new debt issued by the U.S. Treasury. This means that the U.S. federal government is financing its massive deficits in a closed system that is not subject to market forces.

In simple terms, today, when the U.S. government needs more money, it simply sends the bill to the U.S. Treasury department, which then calls the Fed and asks it to fire up the printing presses for the required amount. (Preliminary calls like this are a good idea because it’s hard to keep enough ink on hand at the Fed these days.) No need for any messy price discovery in the bond markets, which lets investors determine yields according to the balance between supply and demand.    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 Bank of Canada Finally Drops Its Rate-Tightening Bias – Monday Morning Interest Rate Update (October 28, 2013)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday.

I always read this report with great interest because it gives us the BoC’s views on the state of the world’s largest economies and includes projections for where the Bank sees foreign and domestic economic momentum headed over the next several years.

I have criticized several of the BoC’s recent MPR’s as being wildly optimistic so I was interested to see this latest version offer a much more cautious view. To be clear, I understand that the Bank must always hedge its comments about our prospects with a little rose colouring, given the influence that its words can have on both our bond and equity markets. But whereas previous MPR reports seemed to require the willing suspension of disbelief, the optimistic tint in this latest version was left more to the margins.

Here are my two key takeaways from the report: 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 Gerrymandering and the U.S. Tea Party Have Helped Canadian Mortgage Borrowers – Monday Morning Interest Rate Update (October 21, 2013)

by Dave Larock

Mortgage Rate ConceptLast week the U.S. government ended its budget crisis and avoided defaulting on its debt, but this much needed reprieve will be short lived.

While the U.S. Congress finally passed a bill to reopen the government and raise the U.S Treasury’s debt ceiling, it only gave the U.S. government enough money to stay open until January 15, 2014, and only gave the Treasury enough breathing room to keep borrowing until February 7, 2014.

Instead of being a lasting resolution, this latest development was just a pause in the action, like the time keeper’s bell going off in the middle round of an eighteen-round fight. Republicans and Democrats merely returned to their corners, where they now wait to be called out for their next round of budgetary brinkmanship. 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 Permanent QE Would Mean for Canadian Mortgage Rates – Monday Morning Interest Rate Update (October 7, 2013)

by Dave Larock

Have tMortgage Rate Concepthe Fed’s quantitative easing (QE) programs now become permanent?

Before we answer that question let’s quickly review why Canadian mortgage borrowers should care:

QE matters to our fixed-rate borrowers because …

  • There has always been a high correlation between Government of Canada (GoC) bond yields and U.S. Treasury yields, but it has grown even stronger since the start of the Great Recession. Over that period, the correlation between our respective yields has risen to about 90%. Thus, when the U.S. Fed artificially suppresses U.S. bond yields it is also suppressing GoC bond yields, on which our fixed-mortgage rates are priced.
  • The level of the U.S. Fed’s intervention in the bond market has been unprecedented. Consider that the U.S. Fed now buys about 80% of all of the new bonds issued by the U.S. Treasury each month and that to do so, the Fed has had to quadruple the size of its balance sheet since the start of the Great Recession (to approximately $3.7 trillion today).
  • The resulting impact on our bond yields (and our fixed-mortgage rates) has been substantial. For now. But if the Fed ever decides to start tapering, U.S. bond yields are expected to rise sharply and if/when that happens, GoC bond yields will be taken along for the ride. We got a taste of this over the summer when U.S. Fed Chairman Bernanke first introduced the word “taper” into his commentary. Our five-year fixed-mortgage rates rose from well below 3% to higher than 3.5% in the span of just a few weeks.

QE matters to our variable-rate borrowers because … 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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As Sovereign Default Fears Rise, Fixed Mortgage Rates Set to Fall – Monday Morning Interest Rate Update (September 30, 2013)

by Dave Larock

Mortgage Rate ConceptOver the past several years, bad economic news from the world’s largest economies has meant good news for Canadian mortgage rates.

When several euro-zone countries tottered on the brink of default, investors responded by pouring their money into Government of Canada (GoC) bonds, driving down these yields, on which our fixed-rate mortgages are based.

When the U.S. Federal Reserve announced that it would initiate quantitative easing (QE) programs to stimulate economic growth, investors once again sought out GoC bonds. And why not? They offered higher yields than equivalent U.S. treasuries; our federal government has the cleanest balance sheet in the G7; our federal deficit is manageable (and shrinking); and the printing presses at our central bank remain idle.

Then an eerie calm ensued. 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 U.S Fed Trades Short-Term Gain for Longer-Term Pain – Monday Morning Interest Rate Update (September 23, 2013)

by Dave Larock

Mortgage Rate ConceptLast Wednesday the U.S. Federal Reserve surprised global markets by deciding not to begin tapering its quantitative easing (QE) programs.

This was unexpected because the Fed had been warning about a QE taper for several months, by saying that the U.S. economy was now on a stronger footing and by repeating the phrase that “tapering is not tightening”, which emphasized the difference between reducing stimulus (tapering) and actually tightening monetary policy (raising interest rates).

When the Fed first warned markets that QE would not go on forever, it was the right thing to do. It had to counteract any belief that we had entered a period of “QE infinity” because that perception would fuel imbalances and distortions that would inevitably destabilize financial markets. Investors couldn’t be allowed to operate under the assumption that the Fed would print money forever. 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 Elephant in the Room – Monday Morning Interest Rate Update (September 16, 2013)

by Dave Larock

Mortgage Rate ConceptToday’s post will run shorter than normal because of the elephant in the room.

This week we will find out whether the U.S. Federal Reserve will in fact begin to slow, or taper, its massive quantitative easing (QE) programs. The Fed’s announcement will dwarf all other short-term influences on mortgage rates and as such, there is not much to talk about until that announcement has been made.

There is a wide range of opinion about what the Fed will do. Some experts think that the recent softening in the U.S. jobs data will push the Fed’s taper timing farther into the future. Others believe that the Fed is more motivated than ever to end its current QE programs because of mounting evidence that this massive balance-sheet expansion is producing very limited benefits.

Only one outcome seems certain: When the Fed makes its official announcement this Wednesday, the people who made bets on the wrong side of the Fed’s tapering decision are going to be in a hurry to cover them, and that should cause bond yields (and many currencies) to move sharply in response. The only question now is the direction of the move.

Five-year Government of Canada (GoC) bond yields were one basis point lower this week, closing at 2.12% on Friday. Our bond yields have gone up so much recently that one would normally expect some pullback, but we haven’t yet seen that. In the meantime, lenders are still playing catch up with bond yields and that means that five-year fixed rates continue to rise. Given the potential for significant volatility this week, anyone who may be in the market for a fixed rate is playing the mortgage version of Russian roulette if they don’t lock in a pre-approval.

Five-year variable-rate mortgages are still being offered in the prime minus 0.50% range (which works out to 2.50% using today’s prime rate). Unlike fixed-rate borrowers, variable-rate borrowers are not subject to the vagaries of the bond-market sentiment. Instead, their rate is controlled by the steady hand of the Bank of Canada (BoC), which continues to have little reason to raise the overnight rate (which variable-rate mortgages are based on) any time soon. This assumes that almost non-existent inflation, sluggish growth, sagging employment and slowing rates of household debt accumulation will still guide the Bank’s interest-rate path.

The Bottom Line: My guess is that the Fed will announce a very modest start to its tapering program, but with plenty of caveats about the pace of any QE wind down being tied to the continued strength of the economic recovery. That said, just about anything seems possible this Wednesday. Get your popcorn ready.

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 U.S. and Canadian Economic News Means for Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 9, 2013)

by Dave Larock

Mortgage Rate ConceptLast week’s reports included a lot of new information that is relevant to Canadian mortgage rates. We received the U.S. and Canadian employment data for August and the Bank of Canada (BoC) met and offered its latest economic and interest-rate commentary. We’ll cover all of these developments in today’s post.

The Latest U.S Employment Data (for August)

The U.S. economy added 169,000 new jobs last month, fewer than the 180,000 new jobs the consensus was expecting. There were also revisions to the June and July employment data which reduced the number of new jobs created in those months by 74,000. While there is always volatility in the monthly employment data, there is no denying that momentum for U.S. job creation continues to slow – the most recent three-month average of 148,000 new jobs per month is much lower than the previous three month average of 172,000 new jobs each month.

U.S. employment trends would be closely watched by investors in any economic environment but they take on even more significance today because the US. Federal Reserve has tied the winding down of its quantitative easing (QE) programs to the health of the U.S. labour market. In that context, and on an overall basis, it seems the latest data should make the Fed less inclined to reduce the magnitude, if not the timing, of its initial QE taper. 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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