Denmark Introduces the First Mortgage with a Negative Interest Rate

Monday Morning Interest Rate Update for August 19, 2019

by David Larock

Canada mortgage ratesGlobal bond yields continued to plummet last week.

There are now almost $17 trillion worth of bonds trading at negative yields, up $4 trillion this month alone.

(Note: anyone buying a bond with a negative yield and holding it to maturity will receive back less than they paid for it.)

Here are some other examples of the “interesting times” in which we live:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Why the Bank of Canada Should Cut its Policy Rate at its Next Meeting

Monday Morning Interest Rate Update for August 12, 2019

by David Larock

Canada mortgage ratesThe Bank of Canada (BoC) has made it clear that it will not hurry to match rate cuts by the U.S. Federal Reserve.

At its last meeting, in July, the Bank assessed that the Canadian and U.S. economic trajectories were converging. Canadian economic momentum was recovering after a slump, and U.S. economic momentum was slowing after a period of above-potential growth. Against that backdrop, the BoC argued, divergent monetary-policy actions were justified.

It is also true that the Fed raised its policy rate by a quarter point nine times during its most recent tightening cycle while the BoC hiked only five times. Even after the Fed’s most recent cut, its policy rate still operates in a range that is 0.25% to 0.50% higher than the BoC’s policy rate.

In that context, I agree that the BoC shouldn’t run out to match the Fed’s next move as long as the Loonie isn’t soaring against the Greenback (which right now, it isn’t). But the Bank has other reasons to cut its policy rate at its next meeting, regardless of what the Fed is doing.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Why Did Financial Markets React as if the U.S. Federal Reserve Raised Last Week?

Monday Morning Interest Rate Update for August 6, 2019

by David Larock

Toronto mortgage ratesThe U.S. Federal Reserve dropped its policy rate by 0.25% when it met last week, from a range of 2.25% – 2.50% to a range of 2.00% – 2.25%. This marked the Fed’s first rate cut since December 2008.

The Fed also announced that it would end its balance-sheet reduction program two months sooner than expected (which is another kind of monetary-policy easing).

Interestingly, financial markets did not respond to this news as expected.

When the Fed lowers its policy rate, borrowing costs fall and this usually stimulates economic growth. Investors normally respond by increasing their holdings in cyclically sensitive assets, like stocks and commodities, and by reducing their exposure to the U.S. dollar (which would be expected to weaken in relation to other currencies).

This time around, in each case, the opposite happened. In the immediate aftermath, equity and commodity prices fell and the Greenback rose.

Put another way, financial markets responded to the Fed as if it had actually raised its policy rate last week. Why?

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Will Lenders Someday Be Paying Us to Take Out A Mortgage? (Don’t Wish For It)

Monday Morning Interest Rate Update for July 29, 2019

by David Larock

Canada mortgage ratesWe live in strange times.

Consider that today more than 13 trillion USD worth of bonds, mostly from Europe and Japan,  trade at negative yields. (When a bond has a negative yield, it means that investors end up with less than they started with by the end of the term.)

The obvious question that follows is why anyone would buy a bond with a negative yield.

Simply put, the market is always governed by either fear or greed. When fear is winning out, as in the case of the bond market today, the safe return of capital takes priority over the return on capital.

Here are five fears that are driving investors into negative bond yields:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

The Mortgage Qualifying Rate Finally Drops, But Without Rhyme or Reason

Monday Morning Interest Rate Update for July 22, 2019

by David Larock

Canada mortgage ratesLast week the Bank of Canada (BoC) lowered its Mortgage Qualifying Rate (MQR) from 5.34% to 5.19%, marking the first MQR decrease since September 2016.

In today’s post I’ll offer a quick review of how the MQR works before highlighting some fundamental and persistent design flaws in this critically important benchmark.

Let’s start with a basic explanation of how the MQR is used during the mortgage qualification process:

  • If you’re in the market for a five-year fixed-rate mortgage today, you’re looking at rates a little below 3%, and if you’re looking for a comparable five-year variable-rate today, those rates are typically about 0.20% to 0.35% higher (a sign of the strange times in which we live).
  • Even though the rate on your five-year mortgage is likely to be a little above or below 3%, lenders will use the MQR rate (now 5.19%) to qualify you for the amount you want to borrow. This “stress test”, as it is commonly called, is designed to ensure that you can afford to renew your mortgage at higher rates down the road.
  • If you are putting down less than 20% of the purchase price of a property, you are always qualified using the MQR.
  • If you are putting down more than 20% of the purchase price of a property, or refinancing/renewing your existing mortgage, your application will be qualified using the greater of the MQR, or the rate on your mortgage plus 2%. (Since most of today’s rates are lower than 3.19%, the vast majority of these borrowers are also now being qualified at the MQR).

The MQR drop of 0.15% only adds a few thousand dollars of purchasing power to each borrower’s bottom line, so that news alone doesn’t warrant much ink. But with the MQR back in the headlines, now seems like a good time to take another look at its fundamental design flaws, none of which have been addressed by our policy makers since its introduction.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

The Bank of Canada (Surprisingly) Opts for Caution

Monday Morning Interest Rate Update for July 15, 2019

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) left its policy rate unchanged at 1.75% last week, as expected.

Once again, “uncertainty” was the main theme pervading both the Bank’s policy statement and its accompanying Monetary Policy Report (MPR).

Somewhat surprisingly, the Bank, which has tended to consistently err on the optimistic side of its forecasts, offered a cautious assessment of our recent run of stronger than expected data. The consensus was ready for the Bank to sound a hawkish tone, but the current backdrop of ongoing trade wars and slowing economic momentum both in the U.S. and globally led to caution winning out.

In today’s post I’ll provide highlights from its latest communications to explain why.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

The Loonie’s Power (and Its Constraining Impact)

Monday Morning Interest Rate Update for July 8, 2019

by David Larock

Toronto mortgage ratesThe Loonie provides our economy with a useful shock absorber.

When times are tough and it weakens, our exports become more competitively priced and the costs of our imports rise, increasing the appeal of domestic alternatives (where available). This naturally occurring process provides stimulus that has far fewer side affects than alternatives like deficit spending, rate cuts and/or unconventional monetary policies.

When times are good, the Loonie strengthens. Our exports become less competitively priced and the costs of our imports fall, shifting demand away from domestic sources and towards foreign alternatives. This helps to relieve inflationary pressures that typically build during extended periods of strong growth, with fewer negative side effects and a more nuanced impact than Bank of Canada (BoC) rate hikes.

Not every economy enjoys access to this useful tool.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Will the Bank of Canada Lag the U.S. Federal Reserve on Rate Cuts?

Monday Morning Interest Rate Update for June 24, 2019

by David Larock

The U.S. Federal Reserve left its policy rate unchanged when it met last week, but its accompanying commentary has fuelled a consensus view that it will likely start lowering in the near future.

To wit, the U.S. futures market is now pricing in 100% odds of a 0.25% rate cut when the Fed next meets on July 31, and it is pricing in 68% odds that the Fed will lower its policy rate by 0.75% (or more) by the end of this year.

Here are five highlights from the Fed’s latest update:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

If the U.S. Federal Reserve Drops Rates, Will the Bank of Canada Have to Follow?

Monday Morning Interest Rate Update for June 17, 2019

by David Larock

Toronto mortgage ratesThe U.S. Federal Reserve has sounded decidedly more dovish of late, and for good reason.

Recent U.S. economic data have shown slowing momentum in many key areas, such as employment growth, consumer spending, manufacturing output, export sales and home sales. Not surprisingly, the consensus now forecasts that U.S. GDP will slow sharply from 3.1% in the first quarter to around 1.8% in the second quarter on an annualized basis.

This loss of momentum comes after nine quarter-point interest rate increases by the U.S. Fed that began in December 2015. As with  Bank of Canada (BoC) moves, the Fed’s rate hikes take time to assert their full impact. If we use the common assumption that this process takes an average of two years, consider that thus far, five of the Fed’s nine hikes have been on the books for less time than that.

The current U.S. economic expansion is about to become the longest in U.S. history, but the Fed’s aggressive monetary-policy tightening isn’t the only cause for concern.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

What Our Inverted Yield Curve Means for Canadian Mortgage Rates

Monday Morning Interest Rate Update for June 10, 2019

by David Larock

Toronto mortgage ratesIf you are keeping an eye on mortgage rates, then you have probably been reading a lot about inverted yield curves lately.

This is a phenomenon that doesn’t occur very often. In normal markets, longer term interest rates are higher than shorter term rates. A yield-curve inversion happens when the yields offered on longer-term bonds drop below the yields offered on shorter-term bonds.

At first glance, this is counterintuitive. Why would I buy a bond that ties up my money for longer and also gives me a lower return?

Well … since you asked …

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Why the Bank of Canada and the Bond Market Still Don’t See Eye To Eye

Monday Morning Interest Rate Update for June 3, 2019

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) left its policy rate unchanged when it met last week, as expected.

In its accompanying statement, the Bank offered its latest take on the incoming data with specific emphasis on “developments in household spending, oil markets, and the global trade environment”.

In today’s post I’ll break down the BoC’s observations and offer my take on how these three key areas are evolving.

First, some background.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Five Inflation Highlights with Implications for Canadian Mortgage Rates

Monday Morning Interest Rate Update for May 21, 2019

by David Larock

Toronto mortgage ratesThe Bank of Canada (BoC) recently reminded us that its primary mandate is to keep inflation “low, stable and predictable”, even if doing so “may create side effects that make the economy vulnerable to new shocks.”

Given that, anyone keeping an eye on mortgage rates should be paying closing attention to the inflation data, the latest of which were released by Statistics Canada last week.

Here are five highlights:

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

How Bank of Canada Governor Poloz Can Help Increase the Appeal of Longer-Term Mortgages

Monday Morning Interest Rate Update for May 13, 2019

by David Larock

Toronto mortgage ratesLast week Bank of Canada (BoC) Governor Poloz called for more innovation in the Canadian mortgage market. He specifically targeted three key areas where innovation is needed, with longer-term mortgages topping his list.

In today’s post I’ll outline why longer-term mortgages have historically had limited appeal for both borrowers and lenders in Canada, and I’ll offer a suggestion to Governor Poloz on how he can facilitate a dramatic increase in the uptake of already available ten-year fixed-rate terms.

First, a confession.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Why Our Latest GDP Data Make the Bank of Canada’s Latest Forecast Seem Bullish

Monday Morning Interest Rate Update for May 6, 2019

by David Larock

Toronto mortgage ratesLast week we learned that Canadian GDP contracted by 0.14% in February on a month-over-month basis.

While this didn’t come as a surprise to the Bank of Canada (BoC) or to mainstream economists, the contraction is nonetheless concerning because it marks the fourth time in the last six months that our GDP has shrunk. It also puts to rest any hope that the 0.3% month-over-month GDP growth we saw in January was a signal that our stalled economic momentum would recover more quickly than expected.

In its latest Monetary Policy Report (which I summarized here), the BoC predicted that our economy would return to its previous growth trajectory in the second half of 2019. The Bank lowered its estimate of our annual real GDP growth in 2019 from 1.7% to 1.2%, but it also held firm to its belief that our economy would return to “slightly above potential” after that and maintained its GDP growth forecasts of 2.1% in 2020 and 2.0% in 2021.

If the BoC’s most recent forecast is correct, we should expect that it will begin to consider additional rate hikes in early 2020. That would mean that variable mortgage rates wouldn’t rise until then but our fixed mortgage rates, which are priced of Government of Canada bond yields, would be expected to rise sooner in anticipation of the BoC’s move because longer-term bond yields are more sensitive to changes in our economic outlook.

Of course, that scenario is far from certain.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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.

Bank of Canada Update: Rates to Stay Low for Longer

Monday Morning Interest Rate Update for April 29, 2019

by David Larock

Toronto mortgage ratesBank of Canada (BoC) economic forecasts have consistently erred on the bullish side over the past many years.

The Bank’s typical Monetary Policy Report (MPR) acknowledges that current conditions are weaker than expected but then makes the case that they are soon to improve. Wash, rinse, repeat.

The BoC’s hope for better days is not without some foundation. For example, low levels of unemployment can trigger a virtuous, self-reinforcing cycle where robust wage growth leads to increased consumer spending, which then spurs a rise in business investment that stimulates more job creation, etc.

Only things haven’t worked out that way.

Ultra-low unemployment hasn’t fuelled the kind of broad-based wage growth that our policy makers expected to see. We have had increased consumer spending, but it’s been fuelled by rising debt rather than rising incomes – and debt is really just future consumption brought forward. Business investment hasn’t materialized as hoped, and there is little evidence of any self-reinforcing cycle.

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David Larock is an independent full-time mortgage broker and industry insider who helps Canadians from coast to coast. 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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