If the Bank of Canada Delays Interest-Rate Cuts, It Won’t Be for This Reason

Monday Morning Interest Rate Update for October 15, 2019

by David Larock

Canada mortgage ratesRecent U.S. economic data portend a slowdown that could work its way north of the border.

Despite this, some market watchers speculate that the Bank of Canada (BoC) will delay cutting its policy rate for fear that it will fuel increased borrowing and accelerate house-price appreciation (which has picked up on its own lately).

This theory is fundamentally flawed for two reasons:

  1. A BoC rate cut only affects variable mortgage rates, and few borrowers are opting for variable rates in the current environment.

The Canadian yield curve is still inverted, meaning that short-term interest rates are higher than longer-term interest rates, and as such, just about everyone is opting for fixed rates now. Consider that today, the average five-year variable mortgage rate is priced about 0.50% higher than its five-year fixed-rate equivalent.

Given that gap, current variable rates won’t be remotely attractive to most borrowers at least until the BoC has made its third 0.25% cut from today’s levels. The vast majority of borrowers aren’t likely to take on variable-rate risk without receiving an initial discount to the available fixed-rate alternatives.

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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.

Falling U.S. Bond Yields Will Probably Push Canadian Mortgage Rates Lower

Monday Morning Interest Rate Update for October 7, 2019

by David Larock

Canada mortgage ratesThe U.S. economy is showing clear signs of slowing, and the bond futures market is now assigning a 76% probability that the U.S. Federal Reserve will cut its policy rate by another 0.25% when it next meets on October 30 and 70% odds that it will lower by another 0.25% when it meets on January 29.

The Fed’s actions matter to anyone keeping an eye on Canadian mortgage rates.

First, the policy rates at the Fed and the Bank of Canada (BoC) are basically now equal, and that increases the pressure for the BoC to match any additional Fed cuts (as I wrote about in detail in this recent post). If the BoC lowers, Canadian variable-rate borrowers would see their first rate drop in more than four years.

Secondly, the Fed’s actions have an indirect but significant impact on U.S. treasury yields, and Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, usually move in lockstep with their U.S. equivalents. For the most recent example, check out the movements in the 5- year U.S. treasury and GoC bond yields over the past 30 days:

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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 Changes to Help Canada’s Housing Affordability Crisis

Monday Morning Interest Rate Update for September 30, 2019

by David Larock

Canada mortgage ratesLast week was a slow one on the interest-rate news front.

Given that, in today’s post I will turn my attention to a key issue for voters in our upcoming federal election: housing affordability.

Each political party is now offering solutions to address today’s affordability challenges, and last Tuesday I joined TV journalist Carole McNeil on CBC News for a Canada Votes segment that focused on different housing-policy issues and proposals (which you can watch here).

In today’s post, instead of evaluating everyone else’s ideas, I will offer my own view by highlighting five mortgage and real-estate-related changes that are most likely to improve housing affordability (without unduly increasing household debt levels in the bargain).

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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 Will Likely Match the Fed’s Next Rate Cut

Monday Morning Interest Rate Update for September 23, 2019

by David Larock
canada mortgage rates

Last Wednesday the U.S. Federal Reserve cut its policy rate by another 0.25%, dropping it down to a range between 2.00% and 1.75%. In its accompanying statement, the Fed conveyed both optimism and caution.

Before we examine the Fed’s latest statement, let’s recap why the Fed’s actions matter to anyone keeping an eye on Canadian mortgage rates.

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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 Recent Bond Yield Run-up Push Canadian Mortgage Rates Higher?

Monday Morning Interest Rate Update for September 16, 2019

by David Larock
Toronto mortgage rates

When the Bank of Canada (BoC) met on September 4, the Government of Canada (GoC) five-year bond yield stood at 1.12%, which marked a 52-week low.

At the end of that meeting the Bank surprised market watchers when it released a more bullish than expected policy statement, and since then, our bond yields have moved steadily higher. To wit, the five-year GoC bond yield closed at 1.51% last Friday after its sharpest five-day increase in well over a year.

While on first pass the cause and effect of our recent bond-yield surge may seem clear, a closer look suggests otherwise.

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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’s Surprising Announcement

Monday Morning Interest Rate Update for September 9, 2019

by David Larock

Canada mortgage ratesLast week the Bank of Canada (BoC) left its policy rate unchanged, at 1.75%, as the consensus expected, but it also surprised market watchers by maintaining policy-rate language that gave no hint of rate cuts to come.

Most analysts believed that the Bank would shift to a more dovish tone at last week’s meeting and pave the way for a rate drop later this year. Instead, the Bank assessed that its policy rate was still “appropriate” based on current conditions.

For my part, in the lead-up to this meeting I argued that the BoC should cut its policy rate now, and I reiterated that belief even after we learned that overall inflation rose to the Bank’s 2% target in July.

My conclusion, based on the Bank’s oft-stated goal to anticipate the road ahead, was that it should cut its policy rate as a precaution (because it takes time for policy-rate changes to impact our economic momentum). But the Bank decided not to cut, and it didn’t even adopt more dovish language as a milder form of monetary easing.

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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.

At-Target Inflation Shouldn’t Delay the Bank of Canada’s Own Mid-Cycle Adjustment

Monday Morning Interest Rate Update for August 26, 2019

by David Larock

Canada mortgage ratesToday most of the developed world’s central banks worry about having too little inflation if they are lucky and outright deflation if they aren’t. (Central bankers worry about deflation, which is an outright decline in average prices, because their monetary policy tools are much better suited to tamp down inflation than to reignite it.)

Bond-market investors also see deflationary headwinds gathering, and that partly explains the recent breathtaking rise of global bonds with negative yields, which now total around $17 trillion (and counting).

Against that backdrop, the Bank of Canada (BoC) is in an enviable position.

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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.

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.
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