Market Commentary

Despite high oil prices;despite the high dollar:despite the recent hurricanes in the US;despite a manufacturing industry in Canada that is fighting for survival,the Bank of Canada is expected to keep rates going up.The next increase is scheduled for October the 18th and the market expects prime to move up by .25% to 4.75%

Since my last report at the end of August,the financial landscape has changed again.CIBC World markets forecast that long term interest rates would go up and then back down again in early 2006.Well the first part of that prophecy appears to be in the works.The five year bond rate has risen from 3.428 up to 3.605 today(October 7th)Wth an average spread of 1.15% over the 5 year bond,five year mortgage rates should be 4.75% ,up from 4.40% in August,but they are not.Many institutions have October 31st as their year end so they like to get as much volume through before year end as they can.This then translates to a holding pattern on rates.The five year rate right now is anywhere from 4.50% to 4.60% and if the trend in bond market rate increases continues,we will probably see a move in rates towards the end of the month or into early November.

Wondering what to do about interest rates?Fixed or Float??Maybe the following article will help? Financial Post, Lori McLeod October 7, 2005

Just a few years ago, it was clear that going with a variable-rate mortgage would save you money. For the security of locking in at a fixed rate, you'd pay a so-called insurance premium that could end up costing about 200 basis points. But heavy discounts on fixed-rate mortgages and the narrowing spread between short- and long-term interest rates have made the choice today less obvious. Indeed, many people with variable-rate products are trying to guess whether it's time to hunker down and lock in before interest rates rise. We asked three experts to weigh in on the fixed-or-float debate. One has recently locked in. Another sees the benefit of staying the variable course. But the most interesting suggestion here is that, when mortgage options are on a more level playing field, buyers may need to shift their thinking to make the right choices. Instead of trying to guess where rates and house prices are headed, home buyers would do better to think like "mini-corporations." Evaluating their own personal balance sheets and risk tolerance could lead to a more rewarding answer to that proverbial question -- fix or float? .

Bob Dugan-CMHC
BOB DUGAN Chief economist, Canada Mortgage and Housing Corp.
FIX OR FLOAT? There's no clear winner HIS OWN MORTGAGE Fixed. "The benefits are very close between the two right now." With no clear winner in the fixed-versus-variable debate, "it's really going to boil down to the person's willingness to take on risk," says Mr. Dugan. His own family, for example, with four kids and one income, decided on a fixed mortgage. "Locking in right now is going to guarantee you a very low rate and give you security," he says. While the variable rate will still save you money -- at least in the short term -- it does come with the risk factor of a potential rise in rates, he says. "We don't see the kinds of inflation in today's economy that we saw in the '80s or '90s," he notes. But Mr. Dugan says most people, himself included, expect the Bank of Canada to increase rates slowly over time to keep inflation in check. "Lock in today, and that might look pretty good compared to the variable rate once rates have gone up," he says. He also notes you can't really lose by fixing your mortgage now, since rates are at their lowest level since Canada Mortgage and Housing Corp. (CMHC) started collecting data in 1951. By the CMHC's calculations, Mr. Dugan says the heavy discounts offered on fixed-rate mortgages appear to have another benefit. A CMHC study comparing mortgages from 1993 to 1998 suggests that, until mid-1996, people with variable mortgages paid off more of their principal. Then a shift occurred, and fixed mortgages took the lead -- most likely because of heavier discounting off the posted rate, Mr. Dugan says. In the early 1990s, for example, when discounting started to become more widespread, he notes that you'd likely get 25 to 50 basis points off the rate advertised by the banks. That's more like 130 basis points now, he says. Although a more recent study hasn't been done yet, "my suspicion is that the same conditions would hold today -- that the current five-year mortgage would result in a savings for people who took out those rates in 1999/2000," he says. The decision to go short or long also depends on your financial goals, Mr. Dugan says. "You can pay off more of your principal, or take the money now and improve your cash flow," he adds. "There's not a clear winner. It has to be a personal decision."

. Moshe Milevsky-Finance Professor-Schulich School of Business
FIX OR FLOAT? It depends on the individual HIS OWN MORTGAGE Variable. "Don't try to speculate on interest rates because that's not what this decision is all about. What else is going on on your personal balance sheet?" "Obviously when long-term fixed rates were at 7% and short-term rates were going nowhere but down, it made a lot more sense to float," Mr. Milevsky says. In April, 2001, he wrote a much-quoted report that came out strongly in favour of variable-rate mortgages. But things have changed since then, he says. "I'm not telling everyone to go out and float. I'm trying to get people to think in a more integrated fashion about the other liabilities they have, like a corporation does." In other words, when faced with a less obvious choice, you'd be better off carefully analyzing your assets and debts to figure out where your mortgage fits in. For example, if you're invested totally in bonds and rising interest rates could decimate your portfolio, "you don't want your mortgage payments to go up as well," Mr. Milevsky says. This type of investor would probably be wise to lock in their mortgage as a cushion against rising rates. Conversely, an investor heavily weighted to equities would experience less risk floating their mortgage. Investors who've put little down on their homes and have a high ratio of mortgage debt would also be wise to consider the fixed-rate route, he adds. A first-time buyer with a low down payment, for example, runs the risk of ending up with negative equity in their home if hit with the double whammy of higher rates and a decline in house prices, he says. Mr. Milevsky himself has a variable-rate mortgage because he considers a potential rise in interest rates to be a low risk to his balance sheet overall. Taking a step back, Mr. Milevsky espouses a shift in the way people think about their mortgage -- to a "financial-planning approach instead of a one-shot deal." It may be different thinking on the mortgage front, but given the other complex financial decisions people are faced with, it isn't that much of a stretch. Putting money into an RRSP, for example, is a choice about asset allocation, not an isolated decision. There's no reason investors can't exercise the same discipline when choosing a mortgage option. But there's a drawback: It takes a lot of time. "The problem," Mr. Milevsky says, "is that people want 15-second solutions -- 'What should I do about my mortgage?' But it's not that simple."

PAUL MIMS-Vice President-CIBC Mortgages
FIX OR FLOAT? Float it all the way HIS OWN MORTGAGE Variable. "I've been variable my whole life, and I stand behind it." Mr. Mims is "bullish all the way" on floating your mortgage because in the end, he says, "you will save money." He's always had a variable-rate mortgage, and it's paid off for him. While the rate gap between variable and fixed mortgages is closing, Mr. Mims says you just have to look at the numbers to figure out that you'll save money if you float. Currently, he notes, the discount rate for a five-year fixed mortgage is 4.25%. That compares with 3.75% for a variable-term mortgage, meaning "you'll continue to save money for two moves" by the Bank of Canada. That's if the bank stays on its expected course of gradually tightening rates to rein in inflation. Low inflation and a stable rate environment also mean that investors who are considering locking in if rates start to rise in quick succession should have lots of time. "Rates have been fairly stable, not these huge spikes we've seen in the past," Mr. Mims says. "You're not going to wake up one Monday morning and it's going to go up 3%. You're going to see it from a long ways away." Mr. Mims says if the bank rate does go up two or three times in quick succession, you could lock into a fixed term with no penalty or additional costs. One point for consideration is that fixed-term, variable-rate mortgages often specify your lock-in rate. So while there's no up-front cost to the change, don't assume you'll lock in at the same rate as a discounted five-year fixed-rate mortgage. Mr. Mims says he actively promotes variable mortgages to his clients because he wants to save them money. Overall, CIBC has a much higher percentage of variable-mortgage clients, at 70% to 75%, compared with about 20% to 25% at the other banks, he says. But Mr. Mims does note there's some uncertainty in a variable-rate mortgage. "You make your decision at a point in time," he says. "Today you're saving money, but no one can say a year from now that rates are x and y. You can only look at the probabilities." So if you're the type of person who won't sleep at night worrying about rising rates, here's Mr. Mims' advice: "Take fixed, be done with it, and move on."

Other Information For You to Consider

FACTORS THAT AFFECT MORTGAGE RATES: Many people think the Bank of Canada's overnight rate is the sole predictor of where mortgage rates are headed. That isn't the case -- although the central bank's decisions do affect variable rates due to their impact on the prime rate (more below). But if you're a fixed-rate customer, for instance, it's actually the bond market that will help you figure out where your mortgage is headed. There are a range of other factors that also come into play. Here are a few issues you should consider:

PRIME BANK RATE
The amount of interest the Bank of Canada charges financial institutions for short-term loans will affect your variable mortgage. Prime moves in tandem with the Bank of Canada's overnight rate and is used as a benchmark by banks when they set lending rates.

GOVERNMENT BOND YIELDS Banks set fixed-term mortgage rates based on bond yields, then tack on a premium for the risk and service associated with the mortgage. Consistent increases or decreases in the yield on the bond that corresponds with your mortgage term should give an indication on where your rate is headed.

ECONOMIC SENTIMENT Bond yields are based on investors' expectations about where the economy is headed, so that sentiment is one of the drivers of your fixed-term mortgage rate.

INFLATION The cost of goods and services can exceed the Bank of Canada's targets when the economy grows too quickly. This could lead the central bank to raise rates to keep inflation in check, affecting your variable-term mortgage rate.

SUPPLY AND DEMAND A strong economy and high demand for mortgages often means higher mortgage rates, as well. But other factors can come into play -- things like a surge of refinancings or the investment balance of individual lenders.

COMPETITION Financial institutions and brokers compete for your mortgage dollars. This has led to heavy discounting on both fixed and variable products.

MONEY SUPPLY When bank deposits are higher, there's a greater pool available for mortgage funds. In tighter markets, banks may be more selective about allocation of mortgage loans. Source: Compiled by Lori McLeod,; Financial Post Part six of a six-part series.; Ran with fact box "Factors That Affect Mortgage Rates" which has been appended to the story. © National Post 2005

News From August 23rd,2005-CIBC
World Markets report

The latest report from CIBC World Markets is out and here is a summary:

US GDP looking at 4% in Q3 with a focus on replacing inventories, Canada should get a spin off benefit. Given vehicle incentives have been so popular in the US this has driven auto sales and resulted in an overall savings rate of zero in the US, financed by the "bottom in credit quality". Given Dodge has made it very clear the Bank of Canada will begin to bump rates in Sept, CIBC World Markets has factored this in, so that we are left with a Prime of 4.75% come December 05. Prediction is to hold steady at that level through 2006. Bond Markets predicted to continue to perform well with the 10 year bond yield at 3.93 and dipping to 3.70 in March 2006. Low inflation and mixed growth signals suggest a less aggressive than feared tightening cycle.

Since my last report, the bond market has been trading in a narrow range with the 5 year bond hitting a high of 3.495% and a low of 3.32%.In my last report, the 5 year bond stood at 3.40%.Five year rates have risen to 4.45% from 4.40%, but it appears there will be no major movement in long term rates, contrary to what the newspapers have been" heralding" In fact,one of our lenders increased rates across the board and have since dropped their rates back down again.

Prime will go up on September 7th and maybe once again in December.I think what we will see is a leveling off of the yield curve where short term rates will be very comparable to long term rates.Right now we have one year mortgages around 4% and 10 year at 4.94.If prime increases to 4.75% by December,those in a variable past their up front discount period,will be at 4.25%-4.35% so you can see there is a very narrow band of interest rate differential already.If CIBC World markets is right, we may see long term rates bump up slightly and then go down again in early 2006.

The Bank of Canada rate announcement for July 12th follows this email. I have also added an article from 2003 that explains a few factors affecting interest rate fluctuation. The article may give you a better insight into rate movement but it is not an exact science as of late, because the market has been moving in strange directions. Finally, I have added an article from the Toronto Star on the Bank of Canada's announcement.

The only real truth to any rate increases and decreases is the cost to a mortgage holder. For someone in a variable rate mortgage, it is the desire to benefit from a rate lower than a current fixed rate while waiting for the fixed rate mortgages to bottom out. Some people opt to stay in a variable indefinitely and ride the highs and lows believing over time that they will benefit in the long run. This has certainly been the case over the last 5 years.

Ok, so let's talk about cost. If you are in a variable right now at prime less .40%, your interest cost per month on a $100,000 mortgage is $318.29. For those of you in front end discounted variable or fixed rate discounted variables better than .40%, the savings are obviously greater.

Compare the savings above to a current 5 year fixed mortgage at 4.50% and you are saving $53.24 for every $100,000 in mortgage amount per month. Prime would have to increase to 4.90% or an increase of .65% for you to be equal to the current 5 year mortgage rate.

The cost of a .25% increase in rate on a $100,000 mortgage is $1,227 over a 5 year term. The cost of a .50% increase on a $100,000 mortgage is $2,354 over a 5 year term. Look at your own situation and weigh the savings versus the potential cost if rates do go up.

Now let's take a look where we are compared to a couple of weeks ago. The Bank of Canada is somewhat more hawkish on rate increases sooner than later, but then that can be tempered by a slowdown in the export market with a climbing dollar.

The bond market rates bottomed on June 21. The 5 year bond rate at that time was 3.112. The lowest rate to that point was in March 2004 when the 5 year bond rate hit 3.216.The 5 year mortgage rate was 4.40% so it would stand to reason that the 5 year mortgage rate should have hit 4.30-4.35, but it didn't. Lenders held on the spread difference until they could establish that the reduction in rates would hold. It didn't. The bond market rates have been edging up gradually since June 21st and as of July 13th the 5 year bond rate stood at 3.40,up .29 basis points over the low. This should translate into a 5 year mortgage rate of 4.60% but it hasn't. Lenders are using the spread they earned at the low point to offset the higher cost now. It remains to be seen, however, how future economic reports will impact both the Bank of Canada's stance and long term bond rates. If the trend is inflationary, expect to see rates move up.

For those of you in variable mortgages and you wish to know your options,please feel free to contact me or your Mortgage Professional for an appointment.

regards Brian Matthey
on behalf of The Mortgage Professionals-Ian,Guy,Rod,Janet,Joyce,Jeff,Linda

History in the making and It's All good
Here is a copy of my economic report from Jan 19/05-Read It carefully
Subject: Economic report

It's been a while since I issued an economic update because there has little in the way of major news.In fact,the last report was a short one a la 'Readers Digest" style . In 2005,I plan to condense my information a little more for you.If you need me to elaborate on anything as it affects your future plans and/or your clients, just feel free to give me or a Mortgage professional a call. .

I have had two reports in my email this week. One from CMHC,their Housing market report and the other from CIBC World Markets.Jeffrey Rubin,chief economist for CIBC World markets, is the author of the latter report and I have been following him for over two years.His market analysis has been bang on the money so far, so I have a lot of confidence in what he says. If you want an email copy of either of these reports, let me know and I will email you a copy. In a nutshell, prime is going to stay where it is ,at least through the first half of the year because growth estimates are down due to the yet unknown flow through effect of the dollars late fall rally on export markets. If you listen to the radio and read the papers, you will hear whispers of the concerns in many major corporations where their business is tied to the US market. In the long term rates area,he is forecasting that bond rates will comes down to their lowest level ever. The lowest level we ever reached on a 5 year bond was 3.216 in April of 2004 with a corresponding 5 year rate of 4.39,a spread of 1.17 over the bond. In my November email,I told you that the 5 year bond rate had reached 3.762,the lowest rate since August of 2004.The current 5 year bond rate now stands at 3.577,which is a mere .32 basis points above the low established in April 2004.Our current 5 year mortgage rate is 4.65-4.80%,depending on the lender.If Rubin is correct this time, we could see 5 year rates in the 4.25%4.35% range, which would be a historic all time low.
Here is my latest economic report-I love it when a good plan comes together!!!!!

November 2004 5 year Bond rate 3.762
June 8th, 2005 5 year Bond rate 3.19

Look at the long term mortgage rates from 7-25 years. Who would of thought you could get a mortgage for 25 years at 5.49%!!!Never before happened!! Ten year mortgages at 4.99%-ten years of security below 5%!!!The five year rate is almost at it's lowest rate ever. It's down to 4.39 matching the low in April 2004.

The winds of ran economic slowdown are blowing through the markets and there is talk of the upward US rate adjustments coming to an end maybe......All of the signs have fared well for the bond markets where we are seeing new historic lows being set in long term rates for now........Rubin was right again and all of you are reaping the benefits. Variable is still the place to be as we are still expecting another 6-9 months of rate benefit here as well but should we see any upswings in long term rate, we will be starting from new historic lows. If any of you would like to review your lock in and conversion options, just give us a call. If you know of anyone out there who is looking to refinance or who has a mortgage coming due for renewal, please let them know about our great rates.

Last year at this time, May 13th,2004 to be exact, the 5 year bond rate was 3.932 and the 5 year mortgage rate was 5.05-5.10%.
Today, mortgage rates dropped as the bond market has been slowly edging down and now stands at 3.455.This is only .239 higher than the lowest 5 year bond rate ever achieved on March 29,2004.The 5 year mortgage rate back then fell to it's lowest ever at 4.35%.Five year mortgage rates have dropped today below 4.60%,which is a good sign.

Incidentally, we have set new all time lows for 7, 10,15,18 and 25 year term mortgages today. Check out our rates page for details at www.mortgageprokingston.com

Variable still looks like the place to be.

Prime is still at 4.25%.IT'S ALL GOOD HEADING INTO THE VICTORIA DAY WEEKEND!!

Bank of Canada keeps target for the overnight rate at 2 1/2 per cent

OTTAWA÷ The Bank of Canada today announced that it is maintaining its target for the overnight rate at 2 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 2 3/4 per cent.

Data received since the Bank's last interest rate announcement on 1 March indicate that the Canadian and global economies have been evolving largely as expected. There is increasing evidence that the Canadian economy is adjusting to global developments. The Bank's outlook for the Canadian economy through to the end of 2006 is essentially unchanged from that in the January Monetary Policy Report Update, with growth this year and next expected to come primarily from strength in domestic demand. In these circumstances, the Bank decided to leave the target for the overnight rate unchanged.

As the economy moves back to its production capacity in the second half of 2006, core inflation is projected to return to the 2 per cent target around the end of next year. In line with this outlook, a reduction of monetary stimulus will be required over time.

There are both upside and downside risks to the outlook, which continue to relate largely to global developments, the associated relative price changes, and the adjustment of the Canadian economy. The details of the Bank's outlook for output and inflation and an analysis of the risks and uncertainties related to this outlook will be discussed in the Monetary Policy Report, to be released on 14 April 2005.

Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 25 May 2005.

Report from CIBC World Markets-April 5,2005-A Window of Opportunity

As I have mentioned to you previously I follow Benjamin Tal's forecasts religiously. He is one of the senior economist's for CIBC World markets and together with Jeffrey Rubin, their past record of forecasting trends in the economy has been excellent. Here is a summary of his latest report.

In Canada the focus is on stable interest rates to late 2006 and early 2007 when rates are predicted to rise 100 to 200 bps. A variable rate mortgage continues to be the mortgage rate product of choice and especially those products offering an up front substantial discount from prime.

Energy Prices

* Fixed rates in the United States would be 50 bps higher if not for
* Supply of OIL is at an all time low, which coupled with increase in demand is leading to the increased prices we're seeing.
* Even though we're more energy efficient, we're still using more energy because, among other things, Homes are 30% larger than 35 years ago
and the growth is astronomical in terms of SUVs and light truck purchases since 1982. Cars are flat since 1982.
* Is the increase in OIL good for the overall Canadian economy? The answer is NO because energy only represents 3.2% of the GDP in Canada. Manufacturing industries suffer under the increase in OIL prices. * Normally increases in energy prices have been inflationary, but because of globalization's deflationary characteristics, companies have not been able to transfer the increases in energy costs to the consumer like they used to in the 70s and 80s. Canadian Dollar's impact on Rates *The increased Canadian dollar has a similar impact on the economy as does increases in the Bank of Canada rate that leads to increases in Prime.
*The Bank of Canada has continuously lowered it's GDP forecasts from nearly 4%, down to 2.75% as a result of the Canadian dollars impact on the economy and exports.
The dollar is buying low rates a lot of time.
*If the dollar were to hit 90 cents as some predict, rates may drop another 25 bps, so prime would be 4.0%. Rates will maintain their current levels for at least 8 to 10 months and may go up 25 bps after that due to the US increasing the Fed Rate and investors being attracted to the US currency as a result of higher returns south of the border. Prediction is for a 78 cent dollar due to increases in rates in the US and Bank of Canada holding steady.

*Prediction is for stable rates up until late 2006 and/or early 2007. In late 2006 & 2007, rates to rise 100 to 200 bps in Canada. Refinancing Opportunities in Canada

*58% of all mortgages in Canada have been registered in the past 2 years. This is due to the refinancing opportunities and Canadian populations huge amount of activity with their mortgages. This further supports the notion that Canadian consumers are better off front end loading their reduction off Prime, because they're likely to convert in late 2006 (when rates begin rising) or are going to refinance their mortgage or move into another home.
*30% of mortgage in Canada are variable, a record high.

*clients with mortgages renewing in the next 1-2 years, clients who want to consolidate bills or who want to renovate are realizing the benefit of refinancing now especially with the excellent variable rate plans available. By doing so now they take advantage of a quicker pay down of the mortgage and are prepared to make the move into fixed with no cost at their option at any time in the future.