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What Canada’s Latest Mortgage Rule Changes Mean For You – Part One (October 5, 2016)

by David Larock

** Update on the Mortgage Qualifying Rate stress-test that was to be implemented on Oct 17th – The Department of Finance just announced that while the MQR stress-test will be implemented for all high-ratio borrowers, effective October 17, the test will now not be implemented for low-ratio borrowers until the next round of mortgage-rule changes takes effect on November 30.**

Yesterday Canada’s Ficanada house with moneynance Minister Bill Morneau announced a series of changes to the rules used to underwrite insured mortgages. There is a lot to unpack so I’ll do it in three installments: Part One will focus on the change that will take place on October 17, Part Two will cover the changes that will take place on November 30, and Part Three will offer my take on the longer-term impacts that these changes will have on Canadian borrowers and our housing markets across Canada.

Let’s start with the first change, which will be implemented less than two weeks from today.

Effective Oct 17, all insured mortgage applications will be underwritten using the Bank of Canada’s Mortgage Qualifying Rate (MQR).

The MQR was first implemented on April 19, 2010 as an intelligent response to the lessons learned from the U.S. housing crisis (here is a post I wrote that explains how it works in detail). In short, the MQR requires high-ratio borrowers who want to take out either variable-rate loans or fixed-rate loans with terms of less than five years to qualify using a rate that is higher than the actual rate on their mortgage.

Today, the MQR is set at 4.64%, which is about double what you would actually pay for a market five-year variable-rate mortgage, and that gap helps ensure that the borrowers most vulnerable to rate rises can afford higher payments when the time comes.

Two Mondays from now, the MQR “stress test” will be applied to all insured loans, including fixed-rate terms of five years or longer. This will have a much greater  impact than you might at first think because, these days, “insured” doesn’t just refer to the usual high-ratios borrowers who have down payments of less than 20%. A significant percentage of low-ratio mortgages (where down payments are 20% or more) are also now insured, but because the lender typically bears this cost, most affected borrowers never even know it. (Lenders buy low-ratio mortgage insurance, called “portfolio insurance”, because once these mortgages are insured against default they can be securitized more cheaply.)

Here is where the rubber meets that road. I get an email every morning with mortgage rates from twenty-two lenders. Half of them will now have to use the MQR to underwrite every loan they make, regardless of the size, mortgage type or down payment. The other half have funding alternatives that don’t require mortgage insurance, but they cost more to use and their increased usage will push mortgage rates higher. (Also, if our policy makers have real conviction, these balance-sheet lenders should be getting an MQR update from OSFI in the near future as well.) read more…

David Larock is an independent full-time mortgage agent 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 Would the Risk of Higher Mortgage Rates at Renewal Affect You? Monday Morning Interest Rate Update (October 3, 2016)

by David Larock

Mortgage Rate ConceptOur regulators are right to be concerned about our record-high household debt levels, and more specifically, about the continued rise in Canadian mortgage debt outstanding.

With mortgage rates at record lows, everyone can afford to borrow more, and when ultra-cheap borrowing costs are combined with housing markets where there is much more demand than supply, prices rise quickly. Over time, rising prices and rising mortgage debt levels feed each other in a self-reinforcing cycle, especially in places like Vancouver and Toronto, where demand has outpaced supply for some time. The longer this continues, the greater the risk that borrowers will not be able to afford their mortgages at renewal.

To their credit, the majority of borrowers I work with are well aware of the risk that mortgage rates could be higher when they renew, and as part of our discussions, we often stress test their prospective loan to assess the cost of having to renew at a higher rate. To that end, in today’s post I’ll provide an example of what this analysis looks like in our current rate environment. read more…

David Larock is an independent full-time mortgage agent 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 Last Week Was an Important One for Future Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 26, 2016)

by David Larock

Mortgage Rate ConceptToday’s post will provide a summary of three notable developments last week that have implications for Canadian mortgage rates.

The Office of the Superintendent of Financial Institutions (OSFI) Proposes Increased Capital Requirements for Mortgage Insurers

Just when you thought that all of the signs pointed toward ultra-low mortgage rates for as far as the eye can see, along comes our banking regulator, OSFI, with a draft proposal that would require mortgage insurers to put up more capital for mortgages deemed to have elevated levels of default risk as of January 1, 2017.

Our regulators are feeling increased pressure to make policy changes to address overheated housing markets, and tightening up capital requirements for our mortgage default insurers seems like a reasonable place to start (given that default insurance is ultimately backed by Canadian taxpayers).

To date, our default insurers (CMHC, Genworth and Canada Guaranty) have charged the same default insurance premiums for mortgages across all regional Canadian markets. But if increased capital requirements for specific high-priced regions, like Toronto and Vancouver, are introduced, one would expect the cost of the premiums in those regions to rise. So, for example, a borrower who is putting down 10% of the purchase price of a home in Toronto might soon pay a higher default-insurance premium than a borrower making the same down payment in Winnipeg.

Most interestingly, this change would apply to both high-ratio loans, where borrowers are putting down less than 20% of the purchase price, and also to conventional loans, where borrowers are making down payments of 20% or more. The latter is significant because today, the lender typically absorbs the default insurance premiums charged on conventional loans. So whereas a lender can pass on increased insurance costs to high-ratio borrowers by bumping their up-front premiums, on conventional loans those increased costs would most likely be absorbed through mortgage-rate increases. Today there is often a small gap between high-ratio and conventional mortgage rates, where high-ratio borrowers gain a slight discount in exchange for paying for high-ratio default insurance, and that gap is likely to grow wider as a by-product of OSFI’s latest proposal.

In addition to higher borrower costs, default insurers are likely to tighten their underwriting guidelines in markets that require increased capital, which means fewer exceptions for marginal borrowers who are just getting under the bar. And this change will hit many of the monoline lenders harder than banks, because the monolines, which specialize in mortgage lending only, typically need to insure all of their conventional loans against default, whereas banks have access to alternative funding sources that don’t require default insurance.

While higher borrowing costs and a tilted playing field that favours certain lenders over others aren’t music to our ears, raising capital requirements to address the significant and rising disparities between our regional housing markets seems like a prudent move. In the long run, changes like this should continue to be good for us, in a brussel sprouts sort of way. read more…

David Larock is an independent full-time mortgage agent 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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A Quiet Announcement That Could Have a Big Impact on Future Canadian Mortgage Rates – Monday Morning Interest Rate Update (September 19, 2016)

by David Larock

Mortgage Rate ConceptThe Office of the Superintendent of Financial Institutions (OSFI) recently launched a proposal that could push future Canadian mortgage rates higher.

When OSFI makes changes, it first issues a proposal that is “open for public consultation” up to a certain deadline, which in this case is October 18. But OSFI is making this proposal in the same way that I propose to my kids that they brush their teeth before bed – while technically I am asking, one way or another, it’s going to happen.

In its recently revised Capital Adequacy Requirement (CAR) Guideline, which is designed “to ensure that capital requirements continue to reflect underlying risks and developments in the financial industry”, OSFI has made allowances for increased risk at both the individual and market levels.

To account for increased market risk in future, OSFI will add a “countercyclical buffer” to its toolkit. This buffer will require lenders to put aside more capital if OSFI perceives that market risks have become unduly elevated. So, for example, if house prices continue to accelerate in hot regional markets, OSFI could increase lender capital requirements, thereby increasing the cost of the funds that are being lent out. read more…

David Larock is an independent full-time mortgage agent 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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Are You Buying the Hope That the Bank of Canada Is Selling? Monday Morning Interest Rate Update (September 12, 2016)

by David Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its overnight rate unchanged last week, as was widely expected. Some market watchers had speculated that the Bank might actually cut its policy rate in response to the recent worsening in our economic data, but the BoC’s ongoing concerns about rising household imbalances make a near-term policy-rate drop unlikely in all but the most extreme circumstances (for the reasons I outlined in this recent post).

In its accompanying press statement, the Bank followed a familiar pattern, acknowledging that the current data are weak while expressing hope that momentum will soon turn in our favour.

Here are the highlights from the BoC’s latest statement with my comments included: read more…

David Larock is an independent full-time mortgage agent 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. Federal Reserve Might Raise Rates in 2016 – Tuesday Morning Interest Rate Update (September 6, 2016)

by David Larock

Mortgage Rate ConceptThe U.S. Federal Reserve has sounded increasingly hawkish of late, with its members repeatedly raising the prospect of a rate hike in either September or December of this year. Tough talk from the Fed is nothing new, but there may be some new thinking behind it now (more on that in a minute).

The Fed’s rate-increase rhetoric has been primarily attributed to improvements in the U.S. employment data, so all eyes were on the latest U.S. non-farm payroll report last week as investors tried to gauge how the U.S. labour market’s current momentum might affect the Fed’s tightening timetable.

The latest data proved disappointing. The headline number came in well below consensus expectations and the details showed that momentum in the most cyclically sensitive parts of the U.S. labour market has continued to slow.

Here are the key details from the latest U.S. non-farm payroll report: read more…

David Larock is an independent full-time mortgage agent 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.) Elephant’s Latest Twitches and Grunts – Monday Morning Interest Rate Update (August 29, 2016)

by David Larock

Mortgage Rate ConceptLast Friday, U.S. Federal Reserve Chair Janet Yellen gave a much anticipated speech at the Jackson Hole Summit, an annual meeting of the world’s central bankers in Jackson Hole, Wyoming. Fed Chair Yellen covered a wide range of topics and her words were carefully parsed by market watchers around the globe for hints of what the Fed might do and when.

As a reminder, the Fed’s actions matter to Canadian mortgage borrowers because our economy is tightly linked to the U.S. economy. For example, Bank of Canada (BoC) Governor Poloz has long said that any sustainable Canadian economic recovery must be underpinned by increased demand for our exports, and we sell about 80% of those into U.S. markets. The BoC believes that a rise in export demand would trigger a rise in business investment, which would then lead to productivity enhancements and fuel a rise in average incomes. Because this virtuous, self-reinforcing cycle starts with increased U.S. demand for our exports and because changes in U.S. interest-rate policy have a material impact on U.S./Canadian exchanges rates, the Fed’s actions have a direct, and at times substantial, impact on our economic momentum.

More bluntly, the Canadian perspective of the U.S/Canada economic relationship was summed up well by former Prime Minister Pierre Elliot Trudeau, who once said that living next to the U.S. “is in some ways like sleeping with an elephant. No matter how friendly or temperate the beast, one is affected by every twitch and grunt.”

Speaking of those twitches and grunts, here are the highlights from U.S. Fed Chair Yellen’s market-moving speech last week, with my comments included: read more…

David Larock is an independent full-time mortgage agent 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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Five of My Most Read Posts In Case You Missed Them the First Time – Monday Morning Interest Rate Update (August 22, 2016)

by David Larock

Last week was a quiet one for factors that affect Canadian mortgage rates.

We received the latest Canadian Consumer Price Index (CPI) data, for July, and it showed that overall inflation rose by 1.3% last month, down from 1.5% in June and still well below the Bank of Canada’s inflation target rate of 2%.

The U.S. Federal Reserve also released the minutes from its July policy meeting and while some of its members expressed a desire to raise rates sooner rather than later, most preferred to maintain the current wait-and-see approach. As of last Friday, the futures market was still betting that the Fed’s next raise won’t happen until mid-2017, so on balance, this latest release wasn’t a game changer.

With such a slow week on the news front I thought I would revisit five of my most read posts. These are worth a read if you missed them the first time around, and while some are a few years old, the topics are still relevant today: read more…

David Larock is an independent full-time mortgage agent 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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Are Canadian Variable Mortgage Rates Headed Lower? Monday Morning Interest Rate Update (August 15, 2016)

by David Larock

Mortgage Rate ConceptOur economic data haven’t been very encouraging of late and that has caused many of the borrowers I speak with on a daily basis to speculate about whether our variable mortgage rates may be headed lower. While this is a reasonable view to hold under normal circumstances, in today’s post I’ll explain why I don’t think it will happen any time soon.

To briefly set the stage, our GDP growth rate hovers between 0% and 1%, our economy isn’t producing enough jobs to keep pace with the natural rise in our working-age population, and our average income growth is barely keeping pace with overall inflation growth, benign as it is.

Against this backdrop, the Bank of Canada (BoC) would normally be expected to drop its policy rate in an effort to stimulate economic growth, and lenders would quickly pass on that additional saving by lowering their prime rates, which our variable-rate mortgages are priced on. But today we live in anything but normal times, and if you choose a variable-rate mortgage with the expectation of future rate cuts, I think you will be disappointed.

To expand on this view, let’s look at the two key events that must both take place if variable mortgage rates are to fall from today’s levels.

Step one: The BoC must drop its overnight rate.

Here are three reasons why I think it won’t: read more…

David Larock is an independent full-time mortgage agent 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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When All Else Fails, Pray for Rain – Monday Morning Interest Rate Update (August 8, 2016)

by David Larock

Mortgage Rate ConceptLast week we received the Canadian and U.S. employment reports for June, and they stood in stark contrast to each other – Canadian employment fell last month while U.S. employment surged higher.

In today’s post we’ll look at the lowights and highlights from both reports and I’ll explain how ongoing exchange-rate adjustments should help to narrow the employment-momentum gap between our two countries over time (albeit much more slowly than most expected).

Canadian Employment Lowlights for June

  • The Canadian economy lost an estimated total of 31,200 jobs in July. The consensus had expected about 10,000 new jobs after our June report showed a loss of 700 jobs but this did not materialize.
  • What’s worse, we lost 71,000 full time jobs in July, on top of the 39,000 full-time jobs that were lost in June. We added another 40,000 part-time jobs to help cushion some of this blow but that isn’t a trade that our policy makers would willingly make because it typically replaces higher-paying jobs with lower paying ones.
  • Goods-producing employment dropped by another 4,300 jobs in July, failing to recover from the 46,000 jobs this sector lost in June. As a reminder, goods producing employment has outsized importance because these jobs spur employment growth across the broader economy (a study by the Canadian government estimated that, on average, each new goods-producing job stimulates the creation of 2.7 other jobs throughout our broader economy).
  • Our unemployment rate rose from 6.8% to 6.9%, and would have risen to 7% had our participation rate not fallen from 65.5% to 64.5 (as a reminder, our participation rate measures the percentage of working-age Canadians who are either employed or who are actively looking for work). Our participation rate now sits at its lowest level since the turn of the century.
  • Our overall employment momentum has clearly stalled. We had a nice surge in March of this year, but at that time some savvy economists cautioned that employers were “hiring up” in anticipation of a rise in future demand that might not materialize. So far, that call has looked prescient.

Not surprisingly, the Loonie fell sharply on Friday as financial markets digested the new and contrasting employment data from both countries. When the Loonie falls it makes our exports into U.S. markets more competitive, and that should, in theory, provide us with an effective stabiliser when our economic trajectory lags that of the U.S. for any length of time. But the follow through just hasn’t been happening. We had a nice surge in exports in January, but today that momentum is long gone – our total export sales have actually fallen in four of the last five months.

The lag between the cheaper Loonie and expanding export sales is not a complete mystery to our policy makers. The Bank of Canada has said that it can take up to two years for exchange rate movements to work their way through our economy in normal times. Today, we are not in normal times and we are still redefining our export sector after swaths of it were decimated at the start of the Great Recession, when U.S. demand dried up, when the Loonie soared above par with the Greenback, and when so many businesses closed their doors for good. This is going to take time.

Our policy makers have been clear about what they think it will take to get our economy rolling again – we need export growth to fuel the increased business investment that will increase the demand for labour, preferably of the more skilled varieties. But like it or not, our policy makers just can’t force our economy through this transition. read more…

David Larock is an independent full-time mortgage agent 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 the U.S. Federal Reserve Won’t Be Hiking Its Policy Rate Any Time Soon – Tuesday Morning Interest Rate Update (August 2, 2016)

by David Larock

Mortgage Rate ConceptThe U.S. Federal Reserve met last week and decided to leave its policy rate unchanged, as was widely expected. The Fed also issued a brief accompanying statement, which gave us its latest assessment of how the U.S. economy is progressing. Here are the highlights from that statement:

  • The Fed sounded a little more upbeat about some of the recent data, noting that “near-term risks to the economic outlook have diminished”.
  • The Fed observed that “household spending has been growing strongly but business fixed investment has been soft”. I will expand on this key point below.
  • The Fed observed that “the labour market strengthened”, and that “economic activity had been expanding at a moderate rate”. It was encouraged that “job gains were strong in June”, but it also acknowledged “weak growth in May”. The Fed also noted that its dashboard of labour market indicators pointed toward some “increase in labor utilization in recent months”.
  • The Fed did not appear concerned about the effects of recent labour-market improvements on inflation, noting that “inflation has continued to run below the Committee’s 2 percent longer-run objective” and that “market-based measures of inflation compensation remain low”. The Fed added that “longer-term inflation expectations are little changed, on balance, in recent months”.

While the Fed sounded more upbeat about the U.S. economy’s recent progress at the margin, it still lacks compelling evidence that its ultra-accommodative monetary policies have helped to foster sustainable economic improvements. Looking at the pattern of Fed comments over the last few years, we continue to see its key phrases oscillate between dovish and hawkish tones in a pattern that is as inconsistent as the underlying data they are based on. And that uncertainty doesn’t stop at the Fed – it is pervasive among business leaders and makes them reluctant to invest in the kind of capacity improvements and expansion that so many of the world’s economies desperately long for. read more…

David Larock is an independent full-time mortgage agent 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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Inflation in Canada Remains Benign – Monday Morning Interest Rate Update (July 25, 2016)

by David Larock

Mortgage Rate ConceptLast week was quiet on the economic front.

We received the latest Consumer Price Index (CPI) data from Statistics Canada and it showed that overall inflation was flat for the month, with the June CPI holding steady at 1.5% on a year-over-year basis. Benign inflation means that the Bank of Canada can continue to focus its monetary policies on promoting economic growth and on trying to encourage business investment in capacity enhancements and expansion.

Five-year Government of Canada bond yields fell one basis point last week, closing at 0.64% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.49% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.54%.

Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.

The Bottom Line: The U.S. Federal Reserve meets this week and while it is not expected to change its policy rate (the futures market is currently giving 97.6% odds that the Fed holds steady), its accompanying commentary still has the power to move markets. More on that next week.

David Larock is an independent full-time mortgage agent 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’s Latest Comments Bolster the Lower-for-Longer Rate View – Monday Morning Interest Rate Update (July 18, 2016)

by David Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) left its policy rate unchanged last week, as was widely expected.

The Bank also released its latest Monetary Policy Report (MPR), which provides us with its views on the state of our economy and includes projections of where it thinks our economic growth will be headed over the next several years.

In the latest MPR, the BoC emphasized rising uncertainty as a central theme, both for businesses, when making investment decisions, and for central bankers, when trying to determine the optimal path forward. The Bank highlighted the unknowns surrounding Brexit as the main source of today’s uncertainty, but the worry list doesn’t stop there. Other current sources of uncertainty include: the U.S. presidential election, China’s debt bubble, Japan’s relentless quantitative easing, and the Italian banking crisis … just to name a few.

Here are the highlights from the latest MPR: read more…

David Larock is an independent full-time mortgage agent 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 Found Last Week’s Change To The Mortgage Qualifying-Rate Puzzling – Monday Morning Interest Rate Update (July 11, 2016)

by David Larock

Mortgage Rate ConceptLast week the Bank of Canada quietly changed its Mortgage Qualifying Rate (MQR) from 4.64% to 4.74%.

As a reminder, the MQR is used to qualify Canadian borrowers who are applying for either variable-rate mortgages or for fixed-rate terms of less than five years. (Here is a link to my post that explains in detail how the MQR works.)

While this is a relatively minor change, it still worries me. For starters, the MQR has been raised at a time when mortgage rates are falling, so this change has not been made, as it usually would be, in response to market forces. More importantly, this is the first lending-policy tightening since the federal Liberals won their majority last fall and as such, it gives us our first insight into how our new political leadership is likely to handle the mortgage file.

Regular readers of my posts will know that I have been supportive of the entire series of mortgage-rule changes that have made over the last several years. To me they have all been a matter of short-term pain to protect longer-term gains, but this change, minor as it is, is harder to rationalize.

Here are five questions/concerns that I have about last week’s MQR change: read more…

David Larock is an independent full-time mortgage agent 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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Monday Morning Interest Rate Update (July 4, 2016)

by David Larock

Mortgage Rate ConceptI hope that my Canadian readers enjoyed a relaxing Canada Day long weekend, and I wish a happy Fourth of July celebration to our southern neighbours.

Today’s post will be short and sweet. Here is a five-second video which summarizes how the Brexit has progressed since last week. (Videos, like pictures, can be worth a thousand words!)

Five-year GoC bond yields fell six basis points last week, closing at 0.57% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.49% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at about 2.54%.

Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.50% range, which translates into rates of 2.20% to 2.30% using today’s prime rate of 2.70%.

The Bottom Line: Investors continued to worry more about the return of their capital than they did about the return on their capital last week, and our mortgage rates should remain at or below today’s ultra-low levels for as long as fear and uncertainty are the market’s dominant themes.

David Larock is an independent full-time mortgage agent 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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