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history of events that have shaped the mortgage market from 2002 to date.
Events Shaping the Mortgage Rate Market in 2008
BANK OF CANADA STAYS THE COURSE!
Bank of Canada keeps overnight rate target at 3 per cent
posted June 13, 2008
Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent
OTTAWA-
The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.
Since the April Monetary Policy Report (MPR), economic developments have been broadly in line with expectations. However, the balance of risks to the Bank's April projection for inflation in Canada has shifted slightly to the upside. Although the composition of U.S. growth has not been favourable for demand for Canadian goods and services, overall, global growth has been stronger and commodity prices have been sharply higher than expected. At the same time, many of the downside risks to inflation identified in the April MPR have eased, while the evolution of credit conditions has been in line with expectations. The risk remains that potential growth will be weaker than assumed.
With the decline in first-quarter GDP, the Canadian economy is judged to have moved into excess supply, which is expected to increase this year. Consistent with the April MPR, the Bank continues to project that economic growth will pick up this year and accelerate in 2009, owing in part to a firming of U.S. demand and accommodative monetary policy in Canada.
If current levels of energy prices persist, total CPI inflation will rise above 3 per cent later this year. However, with the Canadian economy operating in excess supply, core inflation is expected to remain below 2 per cent through 2009. Both total and core inflation should converge on 2 per cent in 2010 as the economy returns to balance.
Against this backdrop, the Bank now judges that the current stance of monetary policy is appropriately accommodative to bring aggregate demand and supply into balance and to achieve the 2 per cent inflation target. There continue to be important downside and upside risks to inflation in Canada, which the Bank will monitor closely.
Information note:
The Bank of Canada's next scheduled date for announcing the overnight rate target is 15 July 2008. The Bank will publish an updated projection for the economy and inflation, and its assessment of the risks, in the Monetary Policy Report Update on 17 July 2008.
Where Are Variable Rates Headed?
With the Bank of Canada's announcement today,it is evident that they think there is no current need to drop their rate any further to stimulate the economy.There are inflation risks apparent due to energy prices but these are balanced by a decrease in GDP in the first quarter.They feel right now that their monetary policy is in line to keep inflation around their target level of 2%.
This being the case,it is good news for variable rate models as this announcement points to some stability throughout the rest of the year and perhaps into 2009.There is even a hint that the Bank of Canada expects core inflation to remain below 2% throughout 2009.This would mean even more rate stability in prime in the absence of inflation.
Variable rate models then still are the "flavor of the month" and may well be the flavor for the rest of the year into 2009.
BANK OF CANADA MAKES A BOLD MOVE
Rate drop of .50%
posted April 28, 2008
Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent
OTTAWA-
The Bank of Canada today announced that it
is lowering its target for the overnight rate by one-half of a
percentage point to 3 per cent. The operating band for the overnight
rate is correspondingly lowered, and the Bank Rate is now 3 1/4 per
cent.
Growth in the global economy has weakened, reflecting the effects of
a sharp slowdown in the U.S. economy and ongoing dislocations in global
financial markets. Growth in the Canadian economy has also moderated as
buoyant growth in domestic demand, supported by high employment levels
and improved terms of trade, has been substantially offset by the fall
in net exports. While both total and core CPI inflation were running at
about 1.5 per cent at the end of the first quarter, the underlying
trend of inflation is judged to be about 2 per cent, consistent with an
economy that was operating just above its production capacity.
The Bank is now projecting a deeper and more protracted slowdown in
the U.S. economy. This has direct consequences for the Canadian
economic outlook, with declining exports projected to exert a
significant drag on growth in 2008. In addition, tightening credit
conditions and softening sentiment are expected to moderate business
investment and consumer spending. Nevertheless, domestic demand is
projected to remain strong, supported by firm commodity prices, high
employment levels, and the effect of cumulative easing in monetary
policy.
The Bank projects that the Canadian economy will grow by 1.4 per
cent this year, 2.4 per cent in 2009, and 3.3 per cent in 2010.
Consistent with this growth profile, the economy moves into excess
supply in the second quarter of 2008, and spare capacity continues to
increase through early next year. However, a gradual recovery in the
U.S. economy, a return to more normal credit conditions, and
accommodative monetary policy should generate above-potential growth
and bring the economy back into balance around mid-2010.
The recent price-level adjustments for automobiles and the effect of
past changes in indirect taxes will keep measured inflation below
target through 2008. The emergence of excess supply in the economy
should keep downward pressure on inflation through 2009. Both core and
total inflation are projected to move up to 2 per cent in 2010, as the
economy moves back into balance. There are both upside and downside
risks to the Bank's new projection for inflation; these risks appear to
be balanced.
In line with this outlook, some further monetary stimulus will
likely be required to achieve the inflation target over the medium
term. Given the cumulative reduction in the target for the overnight
rate of 150 basis points since December, the timing of any further
monetary stimulus will depend on the evolution of the global economy
and domestic demand, and their impact on inflation in Canada.
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 24 April 2008.
Information note:
The Bank's next scheduled date for announcing the overnight rate target is 10 June
2008.
This move by the Bank of Canada keeps variable rate mortgages in vogue.Deep discounted
up front variable rate mortgages provide the best opportunity for a client to take
advantage of further moves by the Bank of Canada,while waiting for long term rates
to reduce.Clients should consider a discount period of 6-9 months which will give
them significant up front savings and more potential savings down the road if long
term rates drop and they choose to lock in later on.Even if long term rates stay
where they are,clients will have the benefit of the discount period before opting
to lock in.Some clients may choose to stay variable beyond their initial discount
period if prime continues to fall and there is no indication of long term rates
increasing.
With prime now reduced to 4.75%,a six month discounted variable would be 2.40% versus
a 5 year fixed at around 5.39-5.49%!There is still a lot of spread in the long
term rates.The 5 year
bond is still around 3.16 so the spread over bond is around 2.23-2.33%.This is still
a full % point above the historic average of 1.20%.The credit crisis is still in
play and the thought is that the spread should narrow later in the year.We are
seeing lenders offering quick close specials at lower rates that currently available.This
tells me there is spread to play with that is still being kept in the lender's profit
margins.
We will have to see if the Bank's react immediately to the drop in prime.Last time
prime dropped the Banks said they may not follow suit due to squeezed profit margins
but they all eventually moved down,some earlier than others.
Some lenders are promoting a fixed discount variable as opposed to an up front model.The
fixed discount variable is a good model if you are convinced you will stay in a
variable for the next 5 years.It is not a good model if you are convinced that rates
will go up sooner than later and that is where the current economic sentiment points
at this time.Choosing an upfront discounted variable gives you the best bang for
your buck at the front end of your mortgage and your savings in a short period
of time can be substantial.
Bank of Canada Reacts to a Slowing Economy
Rate drop of .50%
posted April 16, 2008
Bank of Canada lowers overnight rate target by 1/2 percentage point to 3 per cent
OTTAWA- The Bank of Canada today announced that it
is lowering its target for the overnight rate by one-half of one
percentage point to 3 1/2 per cent. The operating band for the
overnight rate is correspondingly lowered, and the Bank Rate is now
3 3/4 per cent.
Information received since the January Monetary Policy Report Update (MPRU)
indicates that economic growth in Canada through the four quarters of
2007 was broadly in line with expectations. Domestic demand has
remained buoyant, as rising commodity prices and high employment have
continued to support income growth. Canada's net exports weakened
further in the fourth quarter, reflecting the slowing U.S. economy and
the impact of the past appreciation of the Canadian dollar. Overall,
the Canadian economy remained above its production capacity at
year-end. Core and total CPI inflation - at 1.4 per cent and
2.2 per cent, respectively, in January - have also been consistent with
the Bank's expectations.
At the same time, there are clear signs that the U.S. economy is
likely to experience a deeper and more prolonged slowdown than had been
projected in January. This stems from further weakening in the
residential housing market, which is adversely affecting other sectors
of the U.S. economy and contributing to further tightening in credit
conditions. The deterioration in economic and financial conditions in
the United States can be expected to have significant spillover effects
on the global economy. These developments suggest that important
downside risks to Canada's economic outlook that were identified in the
MPRU are materializing and, in some respects, intensifying.
The Bank now judges that the balance of risks around its January
projection for inflation has clearly shifted to the downside, and, as a
result, the Bank is lowering the target for the overnight rate. Further
monetary stimulus is likely to be required in the near term to keep
aggregate supply and demand in balance and to achieve the 2 per cent
inflation target over the medium term.
The Bank will publish a new projection for the economy and inflation, including
risks to the projection, in the Monetary Policy Report on 24 April 2008.
This move by the Bank of Canada keeps variable rate mortgages in vogue.Deep discounted
up front variable rate mortgages provide the best opportunity for a client to take
advantage of further moves by the Bank of Canada,while waiting for long term rates
to reduce.Clients should consider a discount period of 6-9 months which will give
them significant up front savings and more potential savings down the road if long
term rates drop and they choose to lock in later on.Even if long term rates stay
where they are,clients will have the benefit of the discount period before opting
to lock in.Some clients may choose to stay variable beyond their initial discount
period if prime continues to fall and there is no indication of long term rates
increasing.
With prime now reduced to 5.25%,a six month discounted variable would be 2.90% versus
a 5 year fixed at 5.74%!
What Happened in 2007!
posted January 2008
2007 started off on the heels of an inflationary economy with the
prospect of prime increasing into the year.Long term rates on 5 year
mortgages were sitting at 4.99% and the 5 year bond rate was 3.94%.The
spread over bond was below it's historic average spread of 1.20% Prime
increased to 6.00% and then 6.25% in July and then back again to 6.00% in
December.Best discounted five year mortgage rates moved up from 4.99% to
5.79 in June and by the end of the year were slightly over 6%. Throughout
2007 constant inflationary pressure was evident in the Bank of Canada's
announcements but the Canadian dollar went on a fantastic run that kept
prime from moving significantly higher as the Bank of Canada was concerned
about the affect on Canada's manufacturing and export sector by the higher
dollar.
In the fall the first hint of the effects of a sub prime crisis surfaced in
the US with housing sales and house values retreating along with a high
level of mortgage defaults.The rules of the mortgage game started to change.
In the US for the past 5 or more years,there were a number of products that
gave buyers a substantial up front interest discount for a period of up to
three years.Homeowners were paying an artificially low mortgage payment on
their mortgages and based on the increased value of their property many had
added more debt via lines of credit or second mortgages.When the initial
discount period ended,many homebuyers found themselves unable to handle the
higher payments.Some were able to refinance.Many were not as the value of
their home had gone down so there was not enough equity to pay out all their
debt.These were normal qualified homebuyers and home owners with good credit
Then there was the sub prime market.Borrowers who didn't qualify for
mortgages at prime rates and they faced the same dilemma.On top of all this
there was the impact of a pending recession,an over supply of unsold housing
and wide spread job losses.
Now mortgages and other credit instruments such as credit cards and loans
are sold as prepackaged sophisticated debt instruments to investors in a
pool.These pools are made up of millions of dollars and are sold to
institutional investors who seek a higher rate of return than they can get
on bonds or other more secure investments.These instruments in the US were
the darlings of the investment world and were bought up in large numbers by
banks around the world.When the mortgages,loans and credit cards in these
pools start to go into default the value of these pools come into question
and buyers stop buying.Not only do they stop buying but any investments they
hold start to lose their value.When investors stop buying the money supply
available for mortgages starts to dry up.When sub prime mortgages go into
default,then the value of prime mortgages also gets called into
question.Overnight,funding sources for sub prime lenders dried up and many
sub prime lenders simply closed their doors.Others tightened up their
lending criteria.Prime lenders found their cost of borrowing for short term
money and long term money suddenly went up as investors demanded higher
returns for their risk.All this happened in the US but Canada was not immune
to the overflow effect.More on that in the next section on where are rates
going in 2008.
Where are variable rates going in 2008!-
The first spill over effect of the credit crisis was the loss of the
deep discounts on variable rate mortgages.Where discounts from prime were
common in the range of .75% to 1.00% off prime for a 5 year term these have
been trimmed to .50% and less.The bank's cost of funds for short term
mortgages has increased substantially so we don't any near term correction
in sight .That being said with a current prime rate of 6.00%,the variable
still is a viable alternative to a fixed rate mortgage given what maybe down
the road in 2008.
The Bank of Canada has indicated that there is sufficient evidence of a
recession in the US impacting Canada's economic growth and they are ready to
lower rates ,if Canada's economic growth is affected.
Most market economist's see a drop in rates in 2008 somewhere between a .50%
to 1.00% by year end 2008 but another factor has been added to the mix
.There was an interesting article in the Globe and Mail this morning that
stated that the banks were considering not dropping rates in lock step with
the Bank of Canada.This would destabilize Canada's monetary policy and it is
a step that would not be viewed kindly.The banks argument is the cost of
borrowing has risen on international markets but this cost has in fact
dropped since December.The bank's prime rate is already 1.75% above the Bank
of Canada's prime rate.There is some speculation that if the bank's did so
consumer and business backlash would force them off the fence and if that
didn't do it,the Bank of Canada would do some arm twisting.The Bank of
Canada in fact did drop their rate a .25% on the 22nd and despite the threat
by the banks,they did move down.
Where are fixed rates going in 2008?-
If it weren't for the credit crisis,our current 5 year mortgage rate
would be about 4.75%.The current bond rate is 3.49 and the current 5 year
best discounted mortgage rate is 5.99%.That's a spread of 2.50% which is
1.30% higher than the historical spread.
Why?
Again everything can be related back to the sub prime crisis and the
carryover effect to anything associated with mortgages.Fact is in Canada we
have not been lending as they have in the US as we are much more
conservative in our lending practices.Many of the prime rate mortgages in
Canada are insured by CMHC/Genworth and sold in pools the same way as our US
counterparts ,but we have not experienced anything of the delinquency or
turmoil of our neighbours south of the border.That being said we are being
painted with the same brush."If it happened in the US it could happen here "
is the investor sentiment that has driven yields up.
There is another factor at play here though.Many banks have experienced
serious losses due to their exposure to the sub prime securities.The biggest
loser in Canada has been CIBC who is arranging a private share placement of
$2.5 billion dollars to shore up their balance sheet.Others have reported
losses as well in the hundreds of millions of dollars but there is a feeling
that the full extent of those losses have not yet been revealed.Bond rates
have been falling and yet there has been a minimal adjustment in rates on
long term mortgages.I think the banks's have found an excuse to pad their
profit margins using the credit crisis as excuse to do so to try to make
back some of the bottom line lost in the credit crisis.Certainly the
speculation that the banks would hold their prime rate at a time when the
Bank of Canada would lower theirs speaks to the the same profit motive.
Economist's believe we will see long term rates drop by about .50% this
year.I think we will only see this happen once the true extent of the sub
prime crisis has washed itself through the market and when competition among
the banks returns.One of the advantages that we have as a broker is that we
do not rely on the major institutions for the bulk of our mortgage
business.We have many smaller institutional lenders who are interested in
increasing their share of the mortgage market.As a result,these lenders are
more quick to react to provide us with more competitive rates than the major
banks are willing to provide. Given that long term rates are around 6.00%
and that discounted prime rate models are around 5.50%,the variable rate
mortgage provides a viable alternative to consumers .Financing with a
variable will provide you with an immediate saving of .50% over long term
and there is nothing on the horizon to suggest that long term rates are
going to increase.If prime drops in 2008,there is a further saving.When
competition returns to the long term rate market,rates may drop and that
would be the time to consider locking in.Right now,banks with little or no
exposure to the sub prime crisis are reaping a financial bonus in the extra
spread sitting in fixed rate mortgages.
Late Breaking News-Bank of Canada Weighs in Jan 22,2008
Bank of Canada Reduces it 's rate by .25%
Here is a overview of the Bank's announcement from The Globe and Mail
OTTAWA - The Bank of Canada has cut its key interest rate by a quarter of a
percentage point, and is indicating there are further cuts to come, in order
to help Canada deal with a brutal U.S. slowdown. The central bank said it is
lowering its target rate to 4 per cent - the second month in a row for
looser monetary policy - and said it was slashing its growth forecasts for
the United States and Canada, for this year. Inflation in Canada is also
proving to be less of a threat than the Bank of Canada expected in its last
forecast in October, the bank said, suggesting that prices will remain
suppressed until the end of 2009. Still, the central bank resisted calls for
a steeper rate cut of half a percentage point, saying the Canadian economy
continues to operate in overdrive for now, despite the clouds on the
horizon. The U.S. Federal Reserve announced its surprise massive interest
rate cut of three-quarters of a percentage point about an hour before the
Bank of Canada officially issued its own announcement on Tuesday morning. By
that time, however, the Canadian central bank had already handed over its
statement to journalists in a lock-up - essentially leaving the Bank of
Canada with little choice but to stick with its plan to cut by a quarter of
a percentage point, regardless of the Fed's move. (A Canadian official said
the Fed did not give the Canadian central bank any advance notice of its
surprise cut.) "Financial market conditions have deteriorated since October,
leading to a tightening of credit conditions in industrial countries," the
Bank of Canada said in a one-page statement accompanying its rate
announcement. "Given this, and a deeper, more prolonged decline in the U.S.
residential housing sector, the 2008 outlook for the U.S. economy is now
significantly weaker than at the time of the October [forecast]." Canada's
economy will be hit hard, the central bank said, especially in the export
sector. But because commodity prices have risen in the past few months,
Canadian businesses and consumers have seen their incomes grow, and domestic
demand is expected to hold up relatively well. All told, Canada's economy
will slow this year, and begin gradually recovering in 2009, the bank said.
But in order to get there, more rate cuts will likely be necessary. "In line
with this outlook, the bank has decided to lower the target for the
overnight rate and further monetary stimulus is likely to be required in the
near term to keep aggregate supply and demand in balance and to return
inflation to target over the medium term," the bank concluded. The Bank of
Canada will publish full details of its projections and analysis on
Thursday. It did not say on Tuesday by how much it would slash its growth
forecasts for the United States and Canada, and merely indicated that the
changes would be significant. In October, the central bank projected that
the Canadian economy would expand by 2.3 per cent in 2008, and 2.5 per cent
in 2009. Now, the bank believes 2008 will be weaker than that, but 2009 will
be stronger. Private-sector forecasters expect, on average, that the
Canadian economy will grow by about 2.1 per cent, but they are in the midst
of revising that number down, given the rapid deterioration in the United
States. The central bank's last official projection for inflation in Canada
was that it would fall below its 2 per cent target this year but return to
target by the second half of 2008. On Tuesday, however, the Bank of Canada
extended this timeline by an entire year, saying inflation would not return
to target until the end of 2009 - suggesting it sees weakness in the North
American economy for some time to come. As for the United States, the Bank
of Canada's old growth expectations in October were for 2.1 per cent in 2008
and 3.0 per cent in 2009. Many private-sector analysts say the United States
is skating close to a recession, while some believe the recession is already
here. With the Fed's 75-basis-point cut on Tuesday morning, there is now an
appreciable gap between the American's key interest rate of 3.5 per cent and
the Canadian key interest rate of 4.0 per cent. Talk of such gaps in the
past has led to significant strengthening of the Canadian dollar - something
Canadian exporters would no doubt have serious trouble dealing with right
now.
Land Transfer tax rebate for first time buyers of resale homes
Do you know of a first time buyer who is about to purchase a resale
home?The land transfer tax rebate was previously only applicable to new
homes and has now been expanded to include resale homes.Any purchase
agreement after December 13,2007 qualifies.
If you know of anyone that would like more information I will send them a
complete information package on how they qualify and how they obtain their
refund.Have them send me an email under the heading "Info-Land Transfer Tax
Refund"
New 100% Financing program for rental property
The recent announcement by CMHC to allow 100% financing for buyers of
rental properties will be a boon to those who do not have the necessary
equity to get into this market but who have good credit and good income.
If you are interested in buying investment property,email me under the
heading"rental property" and I will send you a feature sheet which outlines
all the particulars of the program
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