Bank of Canada Announcement - April 24th, 2007
There is no hidden agenda in the latest announcement from the Bank of Canada. While
previous announcements have hinted toward the downside risk associated with a slow down in
the U.S. economy, there are more than sufficient recent economic signals appearing to support
more growth in our economy than was previously expected. There was some thought that
prime would start to drop in the latter half of 2007, but it appears that we are now in line for
prime to remain where it is for the rest of 2007.
The actual press release is below.
OTTAWA - The Bank of Canada today announced that it is maintaining its target for the
overnight rate at 4 1/4 per cent. The operating band for the overnight rate is unchanged, and
the Bank Rate remains at 4 1/2 per cent.
Growth of the Canadian economy has been essentially in line with the Bank's expectations as
set out in the January Monetary Policy Report Update. But inflation has been higher than
expected. Pressures on capacity over the past year have been stronger than previously judged.
Also, food and gasoline prices have recently risen more than expected. After considering the
full range of indicators, the Bank now judges that the Canadian economy was operating just
above its production capacity in the first quarter of this year.
Robust domestic demand continues to support Canada's economic growth. Stronger-thanexpected
growth outside North America has led to rising demand for, and prices of, many
commodities. However, the slowing U.S. economy has had a moderating effect on growth in
Canada.
Over the projection horizon, domestic demand is the main driver of growth in Canada. With
the U.S. slowdown now expected to be somewhat more prolonged than previously projected,
net exports should exert a slightly greater drag on growth in 2007. The Canadian economy is
projected to grow by 2.2 per cent in 2007 and 2.7 per cent in both 2008 and 2009, returning to
its production capacity in the second half of 2007 and remaining there through 2008 and 2009.
Core inflation is projected to decline to 2 per cent by the end of 2007. Total CPI inflation is
April 2007 Economic Update
projected to rise above the 2 per cent inflation target in the second half of this year, before
returning to the target by mid-2008.
The upside risk to the Bank's inflation projection is that the recent strength of inflation could
be more persistent than projected. The downside risk continues to come from the possibility
of a more pronounced slowdown in the U.S. economy. The Bank continues to judge that the
risks to its inflation projection are roughly balanced, although there is now a slight tilt to the
upside.
The current level of the target for the overnight rate is judged, at this time, to be consistent
with achieving the inflation target over the medium term.
A full analysis of economic and financial developments, trends, and risks will be set out in the
Bank's Monetary Policy Report, to be published on 26 April 2007.
Information note: The Bank of Canada's next scheduled date for announcing the overnight rate
target is 29th of May 2007.
Long-Term Rates
Since late last fall, long term rates have been bouncing around in a range of 25 basis points,
touching down to 4.99% and now back up around 5.24%, for a 5 year term. If you look at our
rates webpage, it will show you the lows for each rate range over the past 40 years and you
will see that, historically, long term rates are still a bargain.
Many people assume that when the Bank of Canada raises or lowers rates it has an immediate
impact on mortgages and this is true, but only as it applies to variable rate mortgages and
short term mortgages.
Long term mortgages (5 years+) are priced off the bond market. In December 2005, the 5 year
bond rate was 3.86% and the 5 year mortgage rate was 4.94%. In July 2006, the 5 year bond
rate was 4.26% and the 5 year mortgage rate was 5.25% - 5.35%.In December 2006, the 5 year
mortgage rate was back down to 4.99% and today it's back up to 5.25% - 5.30%. Interestingly,
the five year rate was 5.35% in December 2002. The bond rate at the time was 4.06% and prime
was at 4.50%.
As of April 25th, the five year bond was 4.09% and our lowest 5 year rate is 5.19%. There are
too many factors to cover here that impact the ebb and flow of bond rates. In simplest terms,
if there is an absence of inflation, rates are stable. If there is a hint of inflation, you will see
long term rates go up and if there is a hint of a downturn, you will see rates go down. I also
watch the stock market. If the market is going up and up, chances are that money is flowing
out of the bond market and rates will start to increase. This is exactly what has taken place
since December.
My point in all of this...Don't worry about whether rates are going up a bit. It is the normal ebb
and flow of the market. Make your decision to go fixed or variable (there are advantages to
both) based on your own personal situation.
Investment Property
In the last report, I talked about imminent changes in policy for investment properties that
would be a huge boon to investors. These policies are now in effect and here is an overview of
those changes.
In the past, rental property up to 4 units was financed with a 25% down payment or a borrower
was required to use alternative equity to make the financing work. Anything more than 75%
financing would face higher rates and draconian costs. There simply was not any appetite for
financing rental property above 75% of value. In addition, there were conditions in place that
would not give due credit to the rental income stream from a property.
The new guidelines introduced will allow financing up to 90% of value of a rental property at
best discounted rates and amortization up to 40 years! It allows for much more recognition of
the rental income than before, making qualification easier. You can also refinance existing
rental properties up to 90% of their current value, thereby allowing the use of appreciated
equity to work for you in buying the next property. You can purchase a rental property and
build any improvement cost into the mortgage. Suffice to say, if you are planning on getting
into the rental property market, 2007 is the year to do it. Please call me if you have any
questions.
Reverse Mortgages (CHIP Home Income Plan)
Over the years, we have had several inquiries on reverse mortgages. This
is a product that fits borrowers who are 60 or older with equity in their
home who want to access that equity in retirement and not have to pay
any mortgage payments in doing so. The funds are tax free and can be
used for any purpose. A reverse mortgage can be used to generate extra
retirement income or estate planning, take trips, pay off debts, buy a boat,
car, vacation home or anything your heart desires, without having to sell
your home or take on a costly monthly payment.
If you have a parent who has equity in their home, it may be something that they may wish to
consider.
Please call me and I will point them in the right direction to have a consultant discuss their
personal situation and how a reverse mortgage can work for them.
The Mortgage Professionals Economic Update -March 6th,2007
Bank of Canada-No Increase again!
Kingston,Ontario March 6th,2007
Bank of Canada Press Release
Bank of Canada keeps target for the overnight rate at 4 1/4 per cent OTTAWA
The Bank of Canada today announced that it is maintaining its target for
the overnight rate at 4 1/4 per cent. The operating band for the overnight
rate is unchanged, and the Bank Rate remains at 4 1/2 per cent. The Canadian
and global economies are evolving broadly in line with the Bank's
expectations as set out in the January Monetary Policy Report Update (MPRU).
Real gross domestic product in Canada increased in the fourth quarter of
2006 at a rate consistent with the Bank's projection in the MPRU, and both
total CPI and core inflation have been largely as expected. At the end of
2006, the Canadian economy is judged to have been operating at, or just
above, its production capacity. The Bank's outlook for output and inflation
in Canada remains essentially unchanged from the MPRU. The Canadian economy
is expected to continue to operate near its production capacity through 2007
and 2008. Total CPI inflation should average just above 1 per cent in the
first half of 2007, returning to the 2 per cent target in 2008. Core
inflation should remain near 2 per cent throughout this period. Despite
recent volatility in global financial markets, the Bank continues to judge
that the risks to its inflation projection are roughly balanced. The main
downside risk continues to be that growth in the U.S. economy could be lower
than expected. The main upside risk continues to be that household spending
in Canada could be stronger than expected, largely because of borrowing
against increased home equity. In line with the Bank's outlook, the current
level of the target for the overnight rate is judged, at this time, to be
consistent with achieving the inflation target over the medium term. The
Bank will present a full and updated analysis of economic and financial
developments, trends, and risks in the Monetary Policy Report, to be
published on 26 April 2007.
Information note: The Bank of Canada's next scheduled date for announcing
the overnight rate target is 24 April 2007
As you will see from the Bank's recent announcement, their feelings are more
weighted now to a hold and wait position. In past announcements there was
more of a rhetoric about "downside risk" due to an economic downturn south
of the border that would spill over into Canada. There is some evidence of a
mild recession due to the pull back in the housing market in the US but they
seem to think there will be more of a soft landing for the economy there as
opposed to a "dull thud".In Canada, there is still evidence of a robust
housing market and an economy that is running on all cylinders, based on a
numbers of factors including job growth. One economist made an interesting
observation concerning job growth.Job creation has been showing strong
numbers ,with ,on average ,over 40,000 jobs per month created in the last 6
months. The jobless rate has plunged to a three decade low and the
employment rate has established a new record.You would think that there
would then be a direct co relation between all these new jobs being created
and the economic benefit to the economy in consumer spending.This has not
taken place.On closer analysis,most job growth has been in the self employed
sector and the lower paying service/retail industries, so wage growth has
been negligent.In addition,resurgent energy prices have offset any
incremental tax relief.So,job growth has kept the economy floating along.Any
drop here will be seen down the road in a slowing economy. To see prime rate
drop we will need to see concurrent quarterly evidence of an economic
slowdown and that doesn't appear to be in the cards in the near term.Any
slowdown in the housing market south of the border will take a few quarters
to work itself through the economy,so economists will be watching the
economy south of the border for those signals and the potential impact on
our economy.In my opinion given the latest economic information,I do not
expect to see prime drop until the late fall.
On long term mortgages,the bond market has continued it's yo-yo performance
and long term mortgage rates have remained within a range of 5.10%-5.30% on
a 5 year term.
RBC Survey:Interest Rates and Home Ownership
Here is a recent RBC Survey weighing in on interest rates and home
ownership:
Canadians don't expect mortgage rates to rise, but do expect housing prices
to go up, says RBC survey
Canadians voicing "buy now rather than later" preference
TORONTO, March 6 /CNW/ - The possibility of mortgage rates rising in 2007
seems to be of much less concern across Canada, according to RBC's 14th
Annual Homeownership Survey. In fact, over half (57 per cent) of Canadians
believe mortgage rates will drop or stay the same, compared to 31 per cent
last year. The RBC poll also reveals that 49 per cent of Canadians are less
apprehensive about interest rate increases, compared to 44 per cent in 2006.
"When we assess the consumer sentiment being expressed in this year's study,
a picture emerges of confident Canadians weighing their homebuying options
in a very positive light," explained Catherine Adams, RBC's vice-president
of Home Equity Financing. At the same time, while over half of Canadians (59
per cent) believe housing prices will rise in 2007, homebuying intentions
are holding steady, with three in ten Canadians (28 per cent) planning to
buy a house over the next two years. As for the value Canadians place on
homeownership, the vast majority (90 per cent) think purchasing a home is a
good investment, according to RBC's poll. As well, the percentage of
Canadians who estimate that the market value of their homes has increased by
50 per cent or more over the past two years, has doubled since last year's
survey (11 per cent compared to 6 per cent.) "It's clear an overwhelming
majority of Canadians believe purchasing a home is a good investment. In
fact, the average Canadian estimates their home has increased by 22 per cent
in the last 2 years," Adams added. "And the 'buy now' message is coming
through loud and clear across all age groups - from 25 through to 55 plus."
Of those Canadians planning to buy a house within two years, an increasing
number are looking at a shorter purchasing window. Over half (58 per cent)
of all Canadians are saying buy now, don't wait for next year. Forty-four
per cent (up from 37 per cent in 2006) are looking at buying within the next
12 to 18 months.
Rental Property Ownership Becomes Easier
In November we introduced the new 100% financing plan for homebuyers.We
followed that with the new 95% refinance plan for existing home buyers.We
have 90% available for cottage purchases. Now you are the first to know
about a new plan introduced by Genworth that will be announced soon to the
lending market. It will not be in place until lenders undertake to support
it and this normally takes a few weeks to do but...........here it is! In
the past, rental property up to 4 units was financed with a 25% down payment
or a borrower was required to use alternative equity to make the financing
work. Anything more than 75% financing would face higher rates and Draconian
costs. There simply was not any appetite for financing rental property above
75% of value. In addition, there were conditions in place that would not
give due credit to the rental income stream from a property. This is about
to change.The new guidelines introduced will allow financing up to 90% of
value at best discounted rates and amortization up to 40 years! It allows
for much more recognition of the rental income than before making
qualification easier. You can refinance existing rental properties up to 90%
of their current value,thereby allowing appreciated equity to be used for
further investment..You can purchase also a rental property and build any
improvement cost into the mortgage. Suffice to say, if you are planning on
getting into the rental property market,2007 is the year to do it,especially
with rates still in around 5% on 5 year money.
The Mortgage Professionals Economic Update -January 17th
Bank of Canada-No Increase again!
Bank of Canada keeps target for the overnight rate at 4 1/4 per cent
OTTAWA‹The Bank of Canada today announced that it is maintaining its target
for the overnight rate at 4 1/4 per cent. The operating band for the
overnight rate is unchanged, and the Bank Rate remains at 4 1/2 per cent.
Global economic expansion has remained robust, although economic growth in
the United States slowed during 2006. With weaker U.S. growth, output growth
in Canada decelerated, likely averaging about 1.6 per cent in the second
half of 2006. This was largely due to reduced U.S. demand for building
materials and motor vehicles ‹ which has adversely affected Canada's exports
‹ and to the need for Canadian businesses to adjust inventories. Final
domestic demand in Canada has continued to contribute strongly to growth.
Inflation has evolved largely in line with the Bank's expectations in the
October Monetary Policy Report (MPR), with total CPI inflation slightly
lower than projected and core inflation slightly higher. The Bank judges
that at the end of 2006, the Canadian economy was operating at, or just
above, its production capacity. There are signs that a significant amount of
the adjustment in the U.S. housing and automotive sectors has already taken
place and that the inventory correction in Canada is well advanced.
Accordingly, the Bank projects that economic growth in Canada will pick up
to about 2 1/2 per cent in the first half of 2007, and that the economy will
continue to operate near its production capacity throughout 2007 and 2008.
Total CPI inflation should average just above 1 per cent in the first half
of 2007, returning to the 2 per cent inflation target in early 2008. Core
inflation should return to 2 per cent in the first half of 2007 and remain
there. The Bank continues to judge that the risks to the inflation
projection are roughly balanced, but the main upside and downside risks
outlined in the October MPR have diminished somewhat. In line with the
Bank's outlook, the current level of the target for the overnight rate is
judged, at this time, to be consistent with achieving the inflation target
over the medium term. An analysis of economic developments, trends, and
risks will be outlined in the Monetary Policy Report Update, to be published
on 18 January 2007.
Information note: The Bank of Canada's next scheduled date for announcing
the overnight rate target is March 6th 2007
While the Bank of Canada rate has remained steady,economists are still
forecasting that the rate will start to reduce in the first quarter of 2007
and that they anticpate the rate could drop by as much as three quarters of
a point by late 2007.
On the fixed rate scene,bond market rates have been yo yoing but in a thin
band.The five year term mortgage is now around 4.99-5.09%.I did forecast in
my last newsletter that we may see 5 year rates below 5% again and shortly
after Chrismas one lender did drop to 4.99%
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