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A Primer on the Bank of Canada’s Evolving Interest-Rate View – Monday Morning Interest Rate Update (June 2, 2014)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) makes its latest policy rate announcement this Wednesday and while there have been some positive economic signals of late, particularly in the U.S., not everyone is convinced that a corner has been turned.

In anticipation of this week’s meeting let’s take a look at the Bank’s recent comments on where inflation and growth, both in Canada and abroad, are most likely headed in future. I will then overlay these views with the Bank’s Wednesday commentary to look for any changes at the margin next Monday, in an effort to help you gain insight into what all of this might mean for our mortgage rates in future. 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 Rising Inflation a Warning That Canadian Mortgage Rates Are On the Way Up? Monday Morning Interest Rate Update (May 26, 2014)

by Dave Larock

Mortgage Rate ConceptWhen Statistics Canada released its latest Consumer Price Index (CPI) report last Friday, it showed that prices have risen by 2% over the most recent twelve months, hitting the Bank of Canada (BoC)’s long-term target for inflation for the first time since April of 2012.

Anyone keeping an eye on where mortgage rates may be headed is well advised to pay attention to the monthly CPI data, which measures the rate at which our average prices are increasing on a year-over-year basis.

The April CPI data beg the question: Are we witnessing the first signs of an uptrend in inflation that will begin to push mortgage rates inexorably higher as so many prognosticators have long been warning? Or is this recent inflation surge just a temporary spike caused by isolated factors?

The answer is important for mortgage borrowers because if inflation is expected to increase more quickly than previously believed, Canadian bond investors will demand higher yields to preserve their expected returns, and this will cause fixed-mortgage rates to rise. If inflation runs above the BoC’s target rate of 2% for an extended period, the Bank would also be expected to raise its overnight rate to increase short-term borrowing costs in an effort to slow the inflation rise, and this would push variable mortgage rates higher.

Let’s take a look at the highlights from the latest CPI data to try to answer this key question: 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 Victoria Day Weekend – Tuesday Morning Interest Rate Update (May 20, 2014)

by Dave Larock

Mortgage Rate ConceptI hope you enjoyed a rejuvenating Victoria Day weekend.

After the longest and coldest winter I can remember, I am happy to report that the sun made an appearance over Toronto yesterday. There were actual sightings of people wearing shorts and rumour has it that the city sold its first bottle of suntan lotion for the year.

Five-year Government of Canada bond yields fell nine basis points last week, closing at 1.54% on Friday. Five-year fixed-rate mortgages are still offered in the 2.84% to 2.99% range, and five-year fixed-rate pre-approvals are available at rates as low as 3.09%.

Five-year variable-rate mortgages are offered at rates in the prime minus 0.65% range, which works out to 2.35% using today’s prime rate of 3.00%. The Mortgage Qualifying Rate (MQR) fell to 4.79% last week, making it a little easier for borrowers to qualify for variable-rate mortgages and for fixed-rate terms of less than five years. (If you want to learn more about how the MQR works, here is a post I wrote that explains it in detail).

The Bottom Line: The falling Loonie continues to provide stimulus to our economy, which David Rosenberg recently estimated is equivalent to a 3.00% cut in our interest rates. The benefits of the cheaper Loonie are materializing slowly, but they should help to brighten our economic prospects . I will continue to monitor those prospects and watch for any improvement that could affect our mortgage interest rates in the weeks to come.

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 Employment Data Mean for Our Mortgage Rates – Monday Morning Interest Rate Update (May 12, 2014)

by Dave Larock

Mortgage Rate ConceptThe Canadian economy shed 29,000 jobs last month, confounding the consensus forecast, which had called for a gain in the 13,500 range.

This continues a trend where a surge in job creation one month is followed by a plunge immediately afterwards. In the latest example, the 43,000 new Canadian jobs that were created in March were almost completely cancelled out by the 29,000 jobs we lost in April.

If you’re keeping track of where mortgage rates may be headed, the employment data are worth following because the cost of labour is one of the most important drivers of overall inflation. And of course inflation and interest rates are closely linked.

When job creation is robust, the demand for labour begins to outstrip its supply and employers raise wages and salaries in order to compete for limited resources. Rising labour costs fuel general price inflation, which pushes up our interest rates over time. Conversely, when job creation is weak, a surplus of available labour ensures that its cost remains relatively consistent and helps keep inflation, and interest rates, stable. (That said, it’s not as though we should be rooting for a weak labour market, which corresponds with lower rates of economic growth.)

Here are the highlights from our April employment data: 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 Mortgage Rates: Finding the Break-Even Point – Monday Morning Interest Rate Update (May 5, 2014)

by Dave Larock

Mortgage Rate ConceptThis week we dust off the old crystal ball to offer a fresh spin on the age old question of whether a fixed- or variable-rate mortgage will prove the better option over the next five years.

It has been five months since we last compared the potential costs of fixed versus variable and over that time the gap between these rates has narrowed considerably. Market five-year rates have moved from prime minus 0.55% to prime minus 0.65% while five-year fixed rates dropped from 3.35% to 2.99%.

The narrowing gap between fixed and variable rates makes it harder to decide between them. Do you take the fixed rate because it gives you cost and payment certainty for a premium of only 0.64% over the variable rate? Or do you bet that the same subdued economic forecasts that have driven fixed rates lower will keep our variable rates pinned down for years to come?

In today’s post, to help inform this decision, I will provide a rationale for a variable-rate forecast that would leave today’s variable-rate borrowers with about the same overall borrowing cost as those who opt for a five-year fixed-rate mortgage over the same period. You can then decide for yourself whether the assumptions that lead to my conclusions are too aggressive or too conservative, and thus, whether you think the variable rate risk/reward trade-off is worth 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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My Surprising Take on the BoC’s View That Rates Will Stay Lower for Longer – Monday Morning Interest Rate Update (April 28, 2014)

by Dave Larock

Mortgage Rate ConceptLast week Bank of Canada (BoC) Governor Stephen Poloz made a speech to the Saskatchewan Trade and Partnership (STEP) group, which offered useful insights into our economy and included additional commentary on where the Bank sees our interest rates heading.

I have come to appreciate Governor Poloz for his plain-spoken views on complex topics. Also, whereas I tended to believe that former BoC Governor Mark Carney was ‘talking past’ specific questions and using his rhetoric as a policy tool to influence predetermined objectives, I find that Governor Poloz is much more willing to call a spade a spade. (You can watch the speech and the accompanying press conference to decide for yourself.)

Here is a summary of my key takeaways from Governor Poloz’s most recent comments: 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’s Latest Crystal Ball Reading – Tuesday Morning Interest Rate Update (April 22, 2014)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) released its latest Monetary Policy Report (MPR) last Wednesday and left its policy rate unchanged at 1%, as was universally expected.

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

Here is a summary of the latest MPR: 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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Easter Weekend Update – Stay Tuned

by Dave Larock

Dave’s Update for the week of April 21, 2014 will appear tomorrow (Tuesday).

Stay tuned!

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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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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