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Happy March Break – Monday Morning Interest Rate Update (March 14, 2016)

by Dave Larock

Mortgage Rate ConceptToday’s post will be a short and sweet March-break edition.

Five-year GoC bond yields rose by twelve basis points last week, closing at 0.81% on Friday. Five-year fixed-rate mortgages are available in the 2.39% to 2.59% range, depending on the terms and conditions that are important to you, and five-year fixed-rate pre-approvals are offered at rates as low as 2.79%.

Five-year variable-rate mortgages are available in the prime minus 0.30% to prime minus 0.40% range, which translates into rates of 2.40% to 2.30% using today’s prime rate of 2.70%.

The Bottom Line: The Bank of Canada stood pat last week while the European Central Bank adopted several new measures to loosen its monetary policy further. It’s the Fed’s turn this week, and we’ll most likely be reviewing what it had to say in next Monday’s post.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Will Canadian Mortgage Rates Rise In Response To the Latest U.S. Employment Data? Monday Morning Interest Rate Update (March 7, 2016)

by Dave Larock

Mortgage Rate ConceptWe received the latest U.S. employment data last Friday, and the headline showed that the U.S. economy added an estimated 242,000 new jobs in February. This was well above the 195,000 new jobs that the consensus was expecting, and futures markets responded by raising the odds that the Fed will hike its policy rate later this year. (The odds of the next U.S. Fed hike occurring this November were increased from 45% to 53% on Friday.)

As has so often been the case however, a more detailed look at the latest U.S. non-farm payroll report told a different story than the headline.

Here are the highlights: 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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Should You Choose a Fixed or Variable Mortgage Rate Today? Monday Morning Interest Rate Update (February 29, 2016)

by Dave Larock

Mortgage Rate ConceptIn today’s post we’ll revisit an age-old debate and compare five-year fixed and variable mortgage rates against our current economic backdrop.

Let’s start with variable mortgage rates (VRMs), which are priced off of lender prime rates and typically move when the Bank of Canada (BoC) raises or lowers its overnight rate.

The BoC remains cautious about our economic outlook – who can blame them with oil prices hovering in the $30 range – and that makes it unlikely that the Bank will raise its overnight rate any time soon. In fact, BoC Governor Poloz recently acknowledged that the Bank almost dropped its overnight rate at its last policy meeting earlier this month, so the Bank’s current rate bias is clearly to the downside. And when we overlay our current low-growth, low-inflation domestic environment with today’s global bond market, where almost one third of the world’s government bonds are now trading at negative yields, it seems even less likely that the BoC will turn hawkish in the foreseeable future.

VRMs also offer more flexibility than their fixed-rate mortgage (FRM) equivalents because the penalty to break them is often much smaller. If you break a VRM mid-term, your penalty is typically limited to three months’ interest, whereas FRM penalties are calculated as the greater of three months’ interest or interest-rate differential (IRD). And IRD penalties can be huge, especially if you borrowed from a Big Six Bank. (If you currently have a fixed-rate mortgage with a major Canadian bank, I suggest that you sit down before clicking on that link that explains how different IRD penalties are calculated.) 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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With Negative Interest Rates, All That Glisters Is Not Gold – Monday Morning Interest Rate Update (February 22, 2016)

by Dave Larock

Mortgage Rate ConceptRemember when central bankers had the world convinced that quantitative easing (QE) was the solution to sluggish economic growth? Well, the proof of the pudding is in the eating and after years of QE in many countries, there is considerable evidence that QE has hurt growth rather than helped it.

Today, central bankers are starting to talk about a new cure-all solution – negative interest rates. Their thinking goes something like this: QE hasn’t worked because all of the new money it created isn’t actively circulating throughout the economies that it was supposed to help stimulate (referred to by economists as low monetary velocity). If negative interest rates manage to force that money off of the banks’ bulging balance sheets, growth will pick up and this will lead to increased investment in capacity expansion and productivity enhancements that will fuel further growth, creating a self-reinforcing cycle of positive momentum that will help struggling economies reach ‘escape velocity’. This improvement in growth should also lead to higher inflation, which would then accelerate spending and investment momentum further by raising the cost of delay.

At least that is the idea.

Central bankers certainly aren’t dummies and their theories are based on detailed, serious thinking. But theories rarely play out in practice the way they do on paper.  That is why QE didn’t work as planned – and why negative interest rates aren’t likely to do so either. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Happy Family Day – Tuesday Morning Interest Rate Update (February 16, 2016)

by Dave Larock

Mortgage Rate ConceptHappy Family Day memories.

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

Five-year Government of Canada (GoC) bond yields rose by one basis point last week, closing at 0.59% on Friday. Five-year fixed-rate mortgages are available in the 2.49% to 2.74% range, depending on the terms and conditions that are important to you, and five-year fixed pre-approvals are offered at rates as low as 2.79%.

Five-year variable-rate mortgages are available in the prime minus 0.40% to prime minus 0.30% range, which translates into rates of 2.30% to 2.40% using today’s prime rate of 2.70%.

The Bottom Line: Rising instability risks in China, Japan, the euro zone and across many emerging-market economies are making investors increasingly nervous about what lies ahead. Their heightened fears are making financial markets more volatile. While that has thus far caused GoC bond yields to swing widely in both directions, this rising uncertainty should drive them lower as investors seek out safe-haven assets. As such, if this still-evolving trend continues, it should help exert downward pressure on Canadian mortgage rates.

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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Canadian and U.S. Employment Lower Than Expected in January – Monday Morning Interest Rate Update (February 8, 2016)

by Dave Larock

Mortgage Rate ConceptLast week we received the latest Canadian and U.S. employment reports. Although both headline numbers came in lower than expected, there were silver linings in both countries.

Here are the highlights from the latest Canadian employment report:

  • Our economy shed 5,700 jobs in January, continuing our seesaw trend of gaining jobs in one month and losing jobs in the next. Looking at the longer-term trends, we have now averaged 10,500 new jobs over the last twelve months but only 8,900 new jobs/month over the last six, so our job-creation momentum is continuing to slow.
  • We added 5,600 full-time jobs and lost 11,300 part-time jobs, while paid employment rose by 14,600 new jobs and our self-employed ranks fell by 20,200. Our policy makers will be glad to see us trading part-time jobs for full-time jobs and self-employed jobs for paid employment jobs but they will also be concerned that the improvement in the quality of new-job creation is being more than offset with losses in overall quantity.
  • Average hourly wages have now increased by 2.8% on a year-over-year basis. This trend is encouraging because higher wages increase the purchasing power of the average Canadian worker (better to increase spending by raising incomes than by further increasing our household debt levels).
  • At the provincial level, Ontario was the biggest gainer, adding 19,800 news jobs in January. When I read that statistic, I assumed that we had seen another surge in manufacturing employment, which had expanded by 30,000 jobs in the prior twelve months. Despite the Loonie’s fall however, the manufacturing sector gave back 13,000 jobs last month and Ontario’s gains were actually in trade, education, and accommodation and food services.
  • Not surprisingly, Alberta shed 10,000 jobs again last month and its unemployment rate now stands at 7.4%, putting it above our national average for the first time in almost thirty years. Alberta has served as our economy’s main job-creation engine since the start of the Great Recession and that momentum will be hard to replace.

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 U.S Federal Reserve Surprised Markets Last Week – Monday Morning Interest Rate Update (February 1, 2016)

by Dave Larock

Mortgage Rate ConceptThe U.S. Federal Reserve left its policy rate unchanged last week, as was widely expected, but it also surprised markets by adopting a far more dovish tone about the U.S. economy’s prospects.

How quickly circumstances can change.

When the Fed raised its policy rate in December, its rate-setting committee had predicted that there would be four more rate hikes in 2016. Now, just a month later, the Fed sounds much more cautious and U.S. fourth-quarter GDP growth just clocked in at a paltry 0.7%. Investors are now betting that the next Fed rate hike won’t be until February 2017 (according to CME Group 30-Day Fed Fund futures prices).

The U.S. Fed’s policy statements matter to Canadian mortgage borrowers because our economies are deeply interlinked. That means that while our respective monetary policies can diverge somewhat for a period of time, the Bank of Canada (BoC) will tend to move in the same direction as the Fed over the longer term. As such, the Fed’s policy statements act as a sort of distant-early-warning system for Canadian mortgagors who are trying to predict the timing of the Bank of Canada’s next rate hike (as distant as that prospect may now seem).

Here are the highlights from the Fed’s latest statement: 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 the Bank of Canada Didn’t Deliver Its Expected Rate Cut – Monday Morning Interest Rate Update (January 25, 2016)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) decided to hold its overnight rate steady when it met last week. Financial markets gave 60% odds that the BoC would drop its policy rate in response to Canada’s weak fourth-quarter data, so this most recent policy-rate decision came as a mild surprise.

The Bank offered a cautiously optimistic view of our economic prospects in its accompanying press-conference commentary and in the forecasts in its latest Monetary Policy Report.

Here are my key takeaways from the BoC’s latest communications: 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 Aren’t Canadian Mortgage Rates Falling When They Should? – Monday Morning Interest Rate Update (January 18, 2016)

by Dave Larock

Mortgage Rate ConceptIn Canada, the only things that don’t seem to be falling these days are snow (at least in the Greater Toronto Area) and our mortgage rates.

China’s economic slowdown and the seemingly never-ending drop in the price of oil are combining to hammer the TSX, the Loonie, employment momentum, and consumer and business confidence. All of this has helped push five-year Government of Canada (GoC) bond yields from a high of 0.83% on December 17, down to 0.56% at last Friday’s close. One would normally assume that this twenty-seven basis point drop would cause five-year fixed mortgage rates to fall but that has not been the case lately. In fact, market five-year fixed rates have risen from 2.64% to 2.79% over that same period.

Meanwhile, market five-year variable-rate discounts have shrunk from prime minus 0.50% to 0.35% over this same period, and that is after our lenders had already padded their variable-rate spreads by passing on only fifteen basis points of the two quarter-point overnight-rate cuts by the Bank of Canada (BoC) in 2015.

At first glance, the question of why our mortgage rates are rising when the rates they are priced on are falling was answered when our federal finance department increased the cost of securitizing mortgages through the National Housing Act Mortgage-Backed Securities (NHA MBS) program, the primary funding source used by most residential-mortgage lenders (which I wrote about here). 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 (January 11, 2016)

by Dave Larock

Mortgage Rate ConceptWe received the latest Canadian employment data last week, for December, and it showed that our economy added 22,800 new jobs last month. That was well above the 8,000 new jobs that the consensus was expecting but the strong headline number belied some weakness in the data.

Here are the highlights: 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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Five Factors That Will Drive Canadian Mortgage Rates in 2016 – Monday Morning Interest Rate Update (January 4, 2016)

by Dave Larock

Mortgage Rate ConceptIn today’s post I’ll outline the five key factors that I think will most likely determine the path of Canadian mortgage rates in 2016.

Before we do that though, let’s revisit the post I wrote on the same topic at the start of the 2015 to see how those factors have played out over the last twelve months.

Recap of the Five Factors That I Predicted Would Drive Canadian Mortgage Rates in 2015

  1. The strength of the U.S. economic recovery – The U.S. recovery eventually found a more solid footing in 2015, and as predicted, the Fed’s December rate rise did pull Canadian bond yields higher in sympathy. That said, because the first U.S. rate rise happened so late in the year, the impacts of the Fed’s first monetary-policy tightening in almost a decade have yet to be fully felt.
  2. Slowing growth in China – Slowing growth in China did put downward pressure on commodity prices. The knock-on effects for our economic momentum were mostly negative, and as expected, China’s slowing growth did indirectly exert downward pressure on our mortgage rates.
  3. The continuation of large-scale quantitative easing (QE) programs – The European Central Bank (ECB) finally backed up its words with action and launched QE programs in early 2015, and Japan also expanded its use of QE (again) last year. While China has not officially engaged in QE, it has adopted QE-type policies, for example, by making it easier for their commercial banks to lend more aggressively. China has also continued cutting interest rates, which it still has room to do because its benchmark one-year lending rate sits at a relatively lofty 4.35% today. That said, if China’s growth continues to slow and the country experiences turbulence as it transitions from an export-led to domestic-consumer-led economy, it’s not hard to imagine China adopting full-blown QE if needed. In summary then, the continued wide-scale use of QE and QE-type monetary-policy initiatives exerted downward pressure on global bond yields, as expected, and these developments helped keep Canadian mortgage rates at ultra-low levels.
  4. The price of oil – Lower oil prices exerted downward pressure on our mortgage rates and their sharp fall dealt a body blow to our economic recovery. This made the Bank of Canada (BoC) increasingly cautious, which was expected, and led to two cuts to the BoC’s overnight rate, which was mostly unexpected.
  5. The potential for the next financial crisis – The global economy made it through the last twelve months without experiencing a significant financial crisis, but the worry list of the potential risks to global economic stability is still a long one. More on that for this year below.

Not surprisingly, there is some overlap between last year’s key factors and those that will be most important heading into 2016. Here is this year’s list: 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 the U.S. Federal Reserve’s Rate Hike Might Push Canadian Fixed Mortgage Rates Higher – Monday Morning Interest Rate Update (December 21, 2015)

by Dave Larock

Mortgage Rate ConceptLast Wednesday the U.S. Federal Reserve voted unanimously to raise its policy rate for the first time in nearly a decade. The reaction in financial markets to this widely anticipated move was initially positive, but the euphoria didn’t last long as investors recalibrated their portfolios to account for tighter U.S. monetary policy and the resulting further appreciation of the world’s reserve currency.

Here are the highlights from the Fed’s accompanying press release:

  • U.S. economic activity has been expanding at a “moderate pace”, household spending and business fixed investment have been “solid”, and the housing sector has “improved further”. The Fed expressed increased confidence in a broad range of indicators.
  • The Fed observed that the U.S. labour market has shown both “further improvement” and “considerable improvement”, and the “underutilization of labour resources has diminished appreciably since the start of the year”. In my memory, these are Fed’s most favourable observations about the state of the U.S. labour market since the start of the Great Recession.
  • Inflation continues to run below the Fed’s 2% target and “long-term inflation expectations have edged down”. The overall tone of the Fed’s statement gave me the impression that it would be turning its primary focus away from labour market conditions and back towards inflation when determining the timing and trajectory of its future policy-rate increases.
  • The U.S. economy is likely to require “only gradual increases” in the Fed’s policy rate and the Fed expects that it “will remain below levels that are expected to prevail in the long run” for “some time” yet. Interestingly, the Fed did not make any changes to its accompanying dot plot projections, which chart where each Fed member thinks the federal funds rate will be headed in the coming years. So this initial rate rise does not appear to signal a material change in any Fed member’s longer-term view.
  • The Fed will continue to provide liquidity to financial markets by “reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities … [and by] rolling over maturing Treasury securities at auction … until normalization of the level of the federal funds rate is well under way.” This was a reassurance to investors that the Fed will not start removing liquidity from the market for a long time yet.

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 Last Week’s Changes To Our Mortgage Rules Mean for You – Monday Morning Interest Rate Update (December 14, 2015)

by Dave Larock

Mortgage Rate ConceptLast Friday our federal department of finance announced a change to the minimum down payment requirements for residential mortgages which will take effect on February 15, 2016.

While it received far less media attention, the feds also announced an increase in the cost of funding mortgages through its National Housing Act Mortgage-Backed Securities (NHA MBS) program. This change could have a much greater impact on the broader mortgage market over time because it has the potential to raise costs for all lenders, and these costs are likely to be passed on to mortgage borrowers.

In fact, this may have happened already. I think the NHA MBS cost-increase announcement helps explain why lenders have raised their mortgage rates several times of late, despite the fact that bond yields have mostly been falling. Interestingly, while researching this post I learned that all federal regulated lending institutions recently received a letter from OSFI (our lending regulator) warning them that their funding costs were about to go up. This would appear to solve the mystery of what was driving those persistent rate hikes.

In today’s post I will explain last week’s changes in detail and offer my take on the implications for Canadian mortgage borrowers. read more…

David Larock is an independent full-time mortgage planner and industry insider. If you are purchasing, refinancing or renewing your mortgage, contact Dave or apply for a Mortgage Check-up to obtain the best available rates and terms.
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What the Bank of Canada’s Latest Economic Assessment Means for Our Mortgage Rates – Monday Morning Interest Rate Update (December 7, 2015)

by Dave Larock

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

The Bank also issued its latest policy statement, which is basically an assessment of how events both at home and abroad are influencing its monetary-policy direction. Here are the highlights from the BoC’s latest policy statement, with my accompanying 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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What This Week’s Bank of Canada Announcement Might Mean for Our Fixed Mortgage Rates – Monday Morning Interest Rate Update (November 30, 2015)

by Dave Larock

Mortgage Rate ConceptThe Bank of Canada (BoC) will issue its latest policy statement this Wednesday. It summarizes the Bank’s current assessment of our economy and offers us valuable insight into how the BoC is likely to direct its monetary policy over the short and medium term.

These statements have given our variable-rate borrowers comfort for some time now because the BoC’s carefully crafted words have reassured them that the Bank has no intention of raising its overnight rate, on which our variable-rate mortgages are priced, any time soon. Canadian bond-market investors also listen carefully to the BoC’s pronouncements since any change in the BoC’s monetary-policy bias is likely to affect bond yields, on which our fixed-rate mortgages are priced.

The BoC’s upcoming policy announcement is of particular importance because it comes just ahead of what is expected to be the first policy-rate rise by the U.S. Federal Reserve in almost a decade, and because the Canadian economy has shown some encouraging signs of late, in spite of our energy-sector challenges.

To be clear, while no one expects the BoC to start talking about overnight rate increases, the Bank may replace its dovishly themed language with more neutral phrasing, and even that incremental shift could  push bond yields higher and buoy the Loonie. To that end, here are five key areas that I expect the Bank to touch on, along with my take on what market watchers will be looking for in each case: 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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