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Canadian Mortgage Rates Are Rising – Should Variable-Rate Borrowers Lock In? Tuesday Morning Interest Rate Update (July 4, 2017)

by David Larock

Last week Bank of Canada (BoC) Governor Poloz eliminated any doubt about the BoC’s near-term plans. During an interview on CNBC he said that the two 0.25% overnight-rate cuts that the Bank made in 2015 in response to the oil-price shock have “done their job” and he expressed confidence that our economy’s “surprisingly” strong first-quarter growth rebound would continue.

The market’s reaction was swift.

The futures market raised the odds of a BoC rate rise at its July meeting to better than 50% and the Loonie soared against the Greenback, reaching a nine-month high. Government of Canada (GoC) bond yields surged higher and mortgage lenders wasted no time, quickly raising their fixed rates, which are priced on GoC bond yields, in response.

This marks a rare moment for many of our variable-rate borrowers because the BoC hasn’t raised its overnight rate in more than seven years, which means there are many among this group who have never experienced a rate rise (this is the part where the older generations shake their heads).

Suddenly these borrowers have just been told by the BoC that their rates are going to go up and at the same time, they are nervously eyeing fixed mortgage rates, otherwise known as their conversion parachutes, moving higher.

In today’s post, I’ll explain why the BoC is planning to raise its overnight rate soon, offer my take on the impacts that this will have on our economy, and most urgently, offer my two cents on whether variable-rate borrowers should now convert to a fixed-rate mortgage. read more…

David Larock is an independent full-time mortgage broker 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 Latest Inflation Data Give Us the Proof in the Bank of Canada’s Rhetorical Pudding – Monday Morning Interest Rate Update (June 26, 2017)

by David Larock

Before they were anointed modern-day superheros who could stave off economic downturns with their mighty printing presses, inflate asset bubbles with their ultra-low policy rates and help financial markets leap over bad economic data in a single bound with only a few calming words, central bankers had a simple (and rather boring) mandate: to promote economic stability by using their monetary-policy tools to keep inflation under control.

It is important to remember the Bank of Canada’s (BoC) official mandate in the current context because while the Bank recently adopted a more hawkish stance around the timing of future rate hikes, it still cannot ignore our inflation levels when determining the correct policy-rate path forward.

While investors initially reacted to the BoC’s more hawkish language by bidding up both Government of Canada (GoC) bond yields and the Loonie in anticipation of higher of rates to come, Statistic Canada’s release of our latest inflation data last week, for May, gives us the real proof in the Bank’s rhetorical pudding.

To measure our rate of inflation, the BoC now uses four different Consumer Price Index (CPI) gauges, and its stated goal is to keep each of them within a range of 1% to 3%, and ideally, trending toward its official target rate of 2%.

Perhaps somewhat disappointingly for the BoC, the latest inflation data continue to show benign, gradual price growth that isn’t calling for monetary-policy tightening any time soon. If the BoC were to raise rates against our current backdrop of low inflation, there is a risk that prices might stop rising altogether, and possibly even fall instead (and that phenomenon, known as deflation, is what really keeps central bankers up at night).

Let’s look at the May CPI data and briefly revisit what each of the BoC’s CPI inflation gauges is designed to measure: read more…

David Larock is an independent full-time mortgage broker 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 May Test the Courage of Variable-Rate Borrowers Sooner Than Expected – Monday Morning Interest Rate Update (June 19, 2017)

by David Larock

The Bank of Canada (BoC) took a surprisingly hawkish turn last week and Government of Canada (GoC) bond yields surged higher in response.

Last Monday, Senior Deputy Governor Carolyn Wilkins gave a speech in Winnipeg and offered the following insights into the Bank’s evolving policy-rate view:

  • The Deputy Governor reiterated the BoC’s belief that “the adjustment to lower oil prices is now largely behind us”. That statement is significant because the Bank’s last two policy-rate cuts, in 2015, were made in direct response to collapsing oil prices. If the BoC believes that our economy has completed the necessary adjustments to that oil-price shock, those emergency rate cuts may now be unwound.
  • The Bank wouldn’t raise its policy rate if it thought that the rest of the economy still needed emergency-level stimulus, and to that end, Deputy Governor Wilkens observed that there are “encouraging signs that growth is broadening across regions and sectors”. Our economy has grown by an average of 3.5% over the last three quarters and Ms. Wilkens noted that “70 per cent of industries have been expanding and the labour market continues to improve”, although, as I noted last week, more jobs have not led to more pay for the average Canadian worker thus far.
  • Deputy Governor Wilkins reiterated that the Bank’s main policy-rate objective is maintaining its target of “a 2 per cent inflation rate”, even at the expense of promoting growth. All of our inflation gauges remain well below the BoC’s target, but that statement gives added importance to this Friday’s release of the Consumer Price Index (CPI) inflation data.
  • Like every good economist, Deputy Governor Wilkens hedged a little by noting that “slack in our economy is still translating into below-target inflation” and that “risks to the outlook remain”. That said, she noted that “monetary policy must anticipate the road ahead” and her underlying message was that policy-rate hikes may now be approaching more quickly than previously expected.

The market’s reaction to the Deputy Governor’s speech was somewhat dramatic as both Government of Canada (GoC) bond yields and the Loonie increased sharply. The BoC has repeatedly cited its concern about the “competitiveness challenges” of the Loonie’s strength relative to a basket of other currencies, and its more hawkish policy-rate language has now exacerbated the impact of that challenge. read more…

David Larock is an independent full-time mortgage broker 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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More Jobs Don’t Mean More Pay … for Now – Monday Morning Interest Rate Update (June 12, 2017)

by David Larock

The Canadian economy added an estimated 55,000 new jobs in May, which was more than three times the forecast of 15,000 new jobs that the consensus had been expecting.

This impressive job growth was an encouraging sign that the surge in our first-quarter GDP has stimulated momentum in our broader economy. Interestingly, and somewhat confoundingly, that momentum still hasn’t fueled any meaningful increase in our average wage growth – so while willing Canadians are working, they aren’t seeing an increase in their purchasing power.

Here are five key highlights from the latest Canadian employment data (for May):   read more…

David Larock is an independent full-time mortgage broker 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 Latest U.S. Employment Report Disappointed and Why the Fed Is About To Raise Rates Anyway – Monday Morning Interest Rate Update (June 5, 2017)

by David Larock

The U.S. economy added 138,000 new jobs in May, well below the consensus forecast of 184,000. More importantly, the May headline number came in well under the average of 160,0000 new jobs that were created over the prior six months.

This result bolsters the view that the U.S. labour market is losing momentum and much of the detailed data further support that assessment. Despite this, the U.S. Federal Reserve continues to prepare financial markets for another policy-rate increase in June, and the futures market is currently assigning a 94% probability that this will occur.

At first glance, this timing seems counter-intuitive for a Fed that has until now focused its monetary-policy muscle on helping to improve the health of the U.S. labour market. But I think the Fed’s upcoming decision will mark a change in approach and in today’s post, I explain why.

Let’s start by taking a quick look at the key details in the most recent U.S. non-farm payroll report (for May): read more…

David Larock is an independent full-time mortgage broker 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 Warns … and Waits – Monday Morning Interest Rate Update (May 29, 2017)

by David Larock

The Bank of Canada (BoC) held its policy rate steady last week, as was universally expected, and it also issued a statement that outlined its current view of how both domestic and foreign forces are impacting our economic momentum.

The Bank knows that its words are carefully parsed, and in today’s post I’ll highlight the key phrases that it used in its latest statement and offer my take on the implications for our mortgage rates: read more…

David Larock is an independent full-time mortgage broker 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 Explained: Why a Smaller Down Payment Comes with a Lower Mortgage Rate – Tuesday Morning Interest Rate Update (May 23, 2017)

by David Larock

Did you know that home buyers who make down payments of less than 20% of their purchase price have access to lower mortgage rates than buyers who put down more than that?

This comes as a surprise to many borrowers. After all, doesn’t loan risk decrease as the down payment increases? Why should borrowers who have less skin in the game enjoy lower rates? read more…

David Larock is an independent full-time mortgage broker 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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Should You Choose a Fixed or Variable Mortgage Rate Today? Monday Morning Interest Rate Update (May 15, 2017)

by David Larock

It’s time to take another look at a mortgage question that is as old as the hills: Should you go with a fixed or variable mortgage rate?

In today’s post I outline the key points for and against each option and offer my take on which one is likely to save you money over the next five years.

Three Reasons to Choose Today’s Five-Year Fixed Rate read more…

David Larock is an independent full-time mortgage broker 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 Latest Canada and U.S. Employment Data Raise the Same Vexing Question – Monday Morning Interest Rate Update (May 8, 2017)

by David Larock

Today’s post will be shorter than normal because I was in Vancouver on a mini-vacation this past weekend.

We received the latest Canadian and U.S. employment data last week.

The Canadian economy added only 3,200 new jobs last month, which was below the 10,000 new jobs that the consensus had been expecting. While the latest headline number disappointed, the long-term trends for our job growth are still robust (we have averaged 22,000 new jobs over the past twelve months). read more…

David Larock is an independent full-time mortgage broker 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 Your Mortgage Lender About To Go Bust? Monday Morning Interest Rate Update (May 1, 2017)

by David Larock

In a word, no. But let’s see why, starting with the reason for the question.

Last Wednesday the shares of Home Capital Group (HCG) Inc. plunged 65% after the Ontario Securities Commission (OSC) alleged that several of the company’s senior executives knowingly misled investors by downplaying the impact that an internal mortgage-fraud investigation was having on the company’s funded volumes.

At that time, HCG announced that it had completed an internal investigation into the submission of fraudulent income documentation which led to the suspension of 45 mortgage brokers who together had accounted for almost $1 billion in single-family residential funded mortgage volume over the prior year (2014). The company also laid off some front-line staff but otherwise downplayed the severity of the incident. The OSC now alleges that senior management misrepresented the severity of the fraud and its impact.

For a market that has been inundated with headlines about housing bubbles and record-high debt levels, this was all investors needed to hear before running for the exits. In addition to the stock selloff, savers lined up to pull their money out of the company’s high-interest savings accounts in a classic run on the bank. In what seemed like the blink of an eye, the company’s war-chest of around $2 billion in deposits shrank to less than $500 million.

To cover that call for cash HCG had no choice but to secure a $2 billion emergency line-of-credit at an interest rate of 22% on the first billion borrowed. Suddenly the sharks were circling and market watchers began to wonder aloud if the Canadian mortgage market had just experienced its “Lehman moment”.

As this was unfolding several of my clients who had borrowed from other non Big-Five bank lenders called me to ask if their lender was now in danger of going bust and wondering what, if anything, they should do.

In today’s post I’ll provide a summary of the clear message I gave to them, and include my take on five key questions relating to last week’s events. read more…

David Larock is an independent full-time mortgage broker 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 Factors That Are Now Pushing Canadian Bond Yields Lower – Monday Morning Interest Rate Update (April 24, 2017)

by David Larock

Bond yields continued to fall last week and it is starting to feel as though fear is overtaking greed as the dominant market sentiment.

We are entering a period of rising uncertainty and at times like this, money flows into safe-haven assets like Government of Canada (GoC) bonds as the return of one’s capital becomes a more pressing concern than the return on one’s capital. That rise in demand should help keep GoC bond yields, and the fixed-mortgage rates they are priced on, at today’s ultra-low levels.

Here are five of the biggest worries weighing on investors’ minds at the moment: read more…

David Larock is an independent full-time mortgage broker 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 Thinks of the Recent Surge in Our Economic Momentum – Monday Morning Interest Rate Update (April 17, 2017)

by David Larock

Canada’s economic momentum has surged of late. Our GDP grew by 2.6% in the fourth quarter of 2016 and by another 0.6% in January.

This uptick in growth has fuelled speculation that the Bank of Canada (BoC) may begin to raise its overnight rate sooner than expected, and if that happens, it will have an impact on both our fixed and variable mortgage rates. (As a reminder, our variable mortgage rates are priced directly on the overnight rate, and our fixed mortgage rates are priced on Government of Canada (GoC) bond yields, which quickly adjust to changes in the BoC’s monetary policy.)

Our improving growth backdrop raised the level of anticipation surrounding the BoC’s meeting last week. Market watchers weren’t expecting the Bank to raise its policy rate yet (it didn’t), but they were keen to see how our improving economic momentum would affect the tone of the BoC’s latest Monetary Policy Report (MPR), which gives us the Bank’s assessment of current economic conditions  at home and abroad, and includes projections of our economy’s future trajectory.

The BoC focused its latest MPR around three key issues :

  1. “The extent to which recent strength is signalling stronger economic momentum in Canada and globally …”
  2. “How heightened levels of uncertainty, particularly about US tax and trade policies, should be incorporated in our outlook …”
  3. “How much excess capacity the economy currently has, and the growth rate of potential output going forward.”

Today’s post will take a detailed look at the Bank’s assessment of each of these questions. read more…

David Larock is an independent full-time mortgage broker 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 Haven’t Low Unemployment Rates Led to Rising Inflation? Monday Morning Interest Rate Update (April 10, 2017)

by David Larock

Last week we received the latest Canadian and U.S. employment reports and they continued to confound market watchers.

The unemployment rates in both countries are at levels that should be pushing average incomes higher as the demand for labour outstrips its supply. When that happens, employers are typically compelled to raise compensation in order to attract workers – and since the cost of labour has a pervasive impact on prices across the economy, this increases overall inflation.

But that isn’t happening. Instead, low unemployment levels in both countries have corresponded with wage increases that are hovering close to the overall level of price inflation, and this leaves policy makers with a conundrum.

If low unemployment is a signal that wage inflation is imminent, then they should start raising interest rates soon to avoid falling behind the curve and having to increase them more sharply later (which risks tipping an economy into a recession). But if the unemployment rate is no longer a reliable indicator of the labour market’s health, then policy-rate increases will be premature and could stifle hard-won economic momentum.

Before we examine this question in more detail, let’s take a quick look at the highlights from the latest employment data: read more…

David Larock is an independent full-time mortgage broker 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 Will Better Than Expected GDP Growth Mean for Canadian Mortgage Rates? Monday Morning Interest Rate Update (April 3, 2017)

by David Larock

Canadian economic growth has surged of late.

Our GDP grew at an annualized rate of 2.6% in the fourth quarter of 2016 and last week we learned that it grew by another 0.6% in January. That momentum has economists now raising their GDP growth forecasts for the first quarter of 2017 to as high as 4%.

These recent GDP data contradict the widely held belief that Canadian economic momentum is lagging U.S. economic momentum, and also calls into question the assumption that the Bank of Canada (BoC) will stand pat while the U.S. Federal Reserve repeatedly raises its policy rate in 2017.

The BoC has said previously that it expects our output gap (which measures the gap between our economy’s actual output and its maximum potential output) to close around mid-2018. The Bank would typically begin to raise its policy rate at about the same time that this happens, so the closing of the output gap is a significant milestone for anyone keeping an eye on our mortgage rates.

The question now being asked is: If our economic momentum is accelerating and our output gap closes more quickly than forecast, will our mortgage rates rise more quickly than expected? read more…

David Larock is an independent full-time mortgage broker 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 (Rare) Quiet Week for Canadian Mortgage Rates – Monday Morning Interest Rate Update (March 27, 2017)

by David Larock

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

Our federal budget was dubbed a “non-budget” because its content was more benign than many had feared, with our capital-gains and principal-residence tax exemptions left intact, at least for now.

Government of Canada (GoC) bond yields continued to drop in sympathy with their U.S. counterparts, as investors weigh the likelihood of Trump-led stimulus programs, tax cuts and deregulation against the likelihood of new protectionist trade policies, immigration bans and political infighting. The bond market’s knee-jerk reaction to President Trump’s win always seemed overblown to me, and the recent drop in U.S. bond yields is a sign of investors recalibrating their initial post-election forecasts.

Five-year GoC bond yields fell by eight basis points last week, closing at 1.13% on Friday. Five-year fixed-rate mortgages are available at rates as low as 2.44% for high-ratio buyers, and at rates as low as 2.49% for low-ratio buyers. If you are looking to refinance, you should be able to find five-year fixed rates in the 2.69% to 2.84% range, depending on the terms and conditions that are important to you.

Five-year variable-rate mortgages are available at rates as low as prime minus 0.80% (1.90% today) for high-ratio buyers, and at rates as low as prime minus 0.60% (2.10% today) for low-ratio buyers. If you are looking to refinance, you should be able to find five-year variable rates in the prime minus 0.45% range (2.25% today), depending on the terms and conditions that are important to you.

The Bottom Line: Bond yields continued to drop last week, and with them, the odds of any near-term increases to our fixed mortgage rates. Bank of Canada Governor Stephen Poloz is scheduled to speak in Oshawa this Tuesday and it will be interesting to hear his take on the sustainability of the recent improvement in our economic data, especially given that it has corresponded with a recent slowing of U.S. economic momentum. Stay tuned.

David Larock is an independent full-time mortgage broker 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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