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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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How Will Canadian Mortgage Rates Be Affected by the U.S. Federal Reserve’s Latest Rate Hike? Monday Morning Interest Rate Update (March 20, 2017)

by David Larock

Last week the U.S. Federal Reserve raised its policy rate by 0.25%, as expected.

The market’s reaction to the Fed’s second rate hike since last December was tempered by its accompanying statement, which reassured anxious bond-market investors that additional rate hikes would be “gradual”.

In today’s post, we’ll take a look at the highlights from the Fed’s latest statement (in italics) with my comments added, and then discuss the implications for both Canadian fixed and variable 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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What Will Happen to Canadian Mortgage Rates When the Fed Raises Its Policy Rate This Wednesday? Monday Morning Interest Rate Update (March 13, 2017)

by David Larock

The U.S. Federal Reserve has most investors convinced that it will raise its policy rate at its meeting this Wednesday (Fed futures prices are currently giving an 88.6% probability to a 0.25% Fed policy-rate rise).

When this happens, will U.S. bond yields rise? And will their Canadian equivalents and our mortgage rates get taken along for the ride?

That depends.

Bond-market investors won’t be taken by surprise when the Fed raises on Wednesday because it has telegraphed its next rate move effectively. Left on its own, the Fed policy-rate hike might actually push U.S. bond yields lower because markets tend to buy the rumour and sell the fact. The real impetus for the next move in U.S. bond yields will come from the Fed’s accompanying statement.

Investors will be quick to react to any perceived change in the Fed’s expected policy-rate path and since bond yields around the world react to U.S. bond yield movements, there will be reverberations across the globe.

Bluntly put, if the Fed statement is interpreted as being increasingly hawkish about additional rate increases, expect Government of Canada (GoC) bond yields and our five-year fixed mortgage rates to move higher, at least initially, as investors shoot first and ask questions later.

That said, over the longer term, I continue to believe that the Fed will raise its policy rate more slowly than its rhetoric indicates. Here are five reasons why I say that: 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 Spread Between Canadian Five-Year Fixed and Variable Mortgage Rates Is Set to Widen – Monday Morning Interest Rate Update (March 6, 2017)

by David Larock

When the spread between five-year fixed and variable mortgage rates is narrow, as it has been for the past two years, most borrowers have opted for the stability of the fixed rate.

That makes sense because on the one hand, they aren’t getting paid much of a discount to take on variable-rate risk, while on the other hand, the premium they have to pay for the stability of a fixed interest rate is minimal. In fact, at some points in our recent past the best five-year fixed rates were equal to or even better than their variable-rate equivalents.

This is no longer the case. The gap between our fixed and variable rates has widened of late, and my read of the tea leaves says that it will continue to do so in the near future. Today’s post explains why. 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 U.S. Observations and What They Mean for the Canadian Economy and Our Mortgage Rates – Monday Morning Interest Rate Update (February 27, 2017)

by David Larock

The Canadian economy has shown encouraging signs of improvement of late and market watchers are now predicting that our fourth quarter GDP will come in higher than expected.

While that would further reduce the odds of a Bank of Canada (BoC) rate cut in the near future, which I’m not betting on anyway, neither is it likely to cause the Bank to consider hiking its policy rate. Our economy still has a significant amount of excess capacity, so while an uptick in growth would be encouraging, we will need to see several more quarters of above-trend growth before the current gap between actual output and our maximum potential output closes (and that is around the time that the BoC would be expected to start raising its policy rate).

In the meantime, there is still plenty of action south of the 49th parallel. To that end, here are five recent observations about U.S. events that are unfolding that will weave their way into our economy’s interest-rate narrative over time: 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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Happy Family Day – Monday Morning Interest Rate Update (February 21, 2017)

by David Larock

I hope that everyone enjoyed the Family Day long weekend. I used the holiday yesterday for its stated purpose so today’s post will be short and sweet.

Five-year Government of Canada bond yields rose five basis points last week, closing at 1.16% 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. Borrowers who are looking to refinance 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 them.

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. Borrowers who are looking to refinance 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 them.

The Bottom Line: Expect more bond-yield volatility this week as investors continue to assess whether U.S. Fed Chair Yellen finally means it when she says that the Fed plans to raise its policy rate this summer. So far the market isn’t convinced but that could certainly change, and quickly.

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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Will Another Month of Impressive Jobs Gains Fuel a Rise in Canadian Mortgage Rates? Monday Morning Interest Rate Update (February 13, 2017)

by David Larock

Last week was an interesting one for five-year Government of Canada (GoC) bond yields, which our five-year fixed mortgage rates are priced on.

We started the week with GoC bond yields falling in sympathy with their U.S. counterparts as investors re-evaluated their bets that the Trump presidency would lead to higher growth and inflation. Thus far, President Trump has focused on his anti-immigration and protectionist trade policies and not on his promises for fiscal stimulus and tax cuts.

Investors must also be wondering how much, if any, political capital President Trump will have left once he is done fighting with the courts over his Muslim ban and after he gets through the Senate confirmation hearings for his cabinet appointees. Mind you, when the people you nominate to head the education and labour departments and the Environment Protection Agency have all publicly called for the elimination of the same departments they are now tasked with leading, contentious confirmation hearings shouldn’t come as a surprise.

President Trump’s erratic behaviour also raises geopolitical instability risks, and this too is exerting downward pressure on bond yields because capital flows towards safe-haven assets, like bonds, in uncertain times.

Against that backdrop, we received the latest Canadian employment data, for January, on Friday. The headline came in much higher than expected for the second straight month and Canadian mortgage borrowers are now speculating about whether this continuation of stronger-than-expected employment data might trigger another round of mortgage rate increases.

To help answer that question, let’s start by looking at five key highlights from the latest Canadian 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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The U.S. Federal Reserve Maintains a Cautious Approach to Future Rate Hikes – Monday Morning Interest Rate Update (February 6, 2017)

by David Larock

The U.S. Federal Reserve left its policy rate unchanged last week, as expected.

In its accompanying statement the Fed also offered a generally positive view of the current state of the U.S. economy, but that said, its latest assessment did not read like a warning that materially higher rates were imminent (as an increasing number of market watchers have been predicting).

The Fed’s latest commentary matters to anyone keeping an eye on Canadian fixed mortgage rates because our bond yields have moved in virtual lock step with their U.S. equivalents since the start of the Great Recession. While our economies now appear to be progressing along very different trajectories, for as long as the current bond yield correlations hold, if U.S. interest rates rise, Canadian rates will get taken along for the ride.

Here are five highlights from the Fed’s latest statement, with my comments added: 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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Will Canadian Mortgage Rates Get Trumped? Monday Morning Interest Rate Update (January 30, 2017)

by David Larock

In today’s post we’ll look at how the tumultuous start to the Trump Presidency is likely to affect Canadian mortgage rates, because really, given the current news cycle, how could we not?

Last week President Trump announced a series of controversial immigration measures that touched off waves of condemnation both at home and abroad. The implementation of these new measures served as confirmation, and a warning, that President Trump plans to follow through on the promises he made on the campaign trail, even in the face of overwhelming opposition.  Say what you will about President Trump – he is doing what he said he would as candidate Trump.

This is a concerning development for America’s main trading partners, who until last week might have held out some hope that President Trump’s protectionist trade rhetoric would eventually be tempered by the light of cold, hard economic reality. But we now find ourselves in a world where every traditional, evidence-based warning  by economic experts about the damage that trade barriers will inflict on the U.S. economy is met with “alternative facts” that are free from any burden of proof (or reality).

To cite a few examples: 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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