Mortgage Rates

Last year saw the city of Ottawa set a new record for home sales, surpassing the previous record set in 2007. Obviously, the impact of low mortgage rates and increasing consumer confidence are having the same impact on the residents of Ottawa as those in the rest of the country.

What I didn't realize was how affordable, in comparison to Toronto and Vancouver, housing in Ottawa was. The average price in 2009 for a resale home was $303,900. Meanwhile, that same time period saw the average house in Vancouver sell for almost twice that amount.

Apparently, the Ottawa housing market is known for being moderate and cautious. In part, this is due to the financial stability of the high number of government employees residing in the city. This translates into less mania and panic in the housing market, which in turn results in fewer peaks and valleys in real estate prices.

As I've discussed before, there are now three certainties in life: death, taxes and rising interest rates. So what do we know about interest rates?

We know that the Bank of Canada is going to try to keep interest rates steady until mid-2010, which seems far off. Except that 2010 has already crept up on us, leaving approximately six months to prepare ourselves for higher mortgage rates.

At this point, we have the luxury of knowledge of the financial future. Let's use it. It's important to put a plan in place so that you know how you'll cope in your own personal situation.

The good news is that when interest rates finally rise, my "high-interest" saving account might actually pay a return higher than one per cent.

You found that perfect house or at the very least the house that you want to make a home. The real estate market has bounced back from the downturn and interest rates are at near historical lows. You're pre-approved for a home loan. Sounds like the perfect time to buy that house, right?

Maybe not.

There is growing concern that those buying property at incredibly low interest rates will not be able to afford their mortgages when rates rebound. This is compounded by the current trend of 35 year mortgages and 5% down payments.

For example, a $250,000 mortgage on a five year term and an amortization period of 35 years is only $892 per month at 2.5%, but at 5.5% the payment turns into $1,332. That's a difference of $440 a month.

The solution? Pay down as much as you can now, which should help to cushion the blow when interest rates inevitably rise.

Canada's largest bank, Royal Bank of Canada, took up the lead recently and significantly lowered the interest rates on home equity credit lines. Now offering a variable rate of prime plus .50 percent, RBC is set to do battle with other banks on the secured lending market.

A home equity line of credit is a revolving mortgage product, which uses the equity (up to 80% of home value) as collateral, thereby offering a lower interest rate than unsecured credit. For the past couple of months, we've seen a flurry of special offers regarding secured credit lines, including refunding set up fees, waiving legal fees and other promotions.

RBC stands alone in lowering the offered rate on the secured line, a move that might be seen as a bit too costly for other banks to saddle up to. However, competition on a heavy hitting item like the secured credit line is likely to force Canada's banks to follow suit and offer the same deal to their consumers.

I've said it before and I'll say it again; when one Canadian bank makes a mortgage move, the others will follow.

Bank of Montreal has taken the lead in the last few days by boldly reducing their five-year closed variable rate mortgage offer to straight prime. That's currently 2.25% for those who don't keep track of these things. Buckling under the peer pressure, Scotiabank quickly jumped on board, followed by Royal Bank of Canada. National Trust and other financial companies have joined the cause too.

This is the peak of mortgage season, and our banks have a good chunk of cash at their disposal to lend the wanton homeowner. If you're bank or financial institution hasn't made the move to prime, feel free to haggle your way down, or just wait a few days until they also drop their rates.

Will we be seeing rates with a spread below prime on the horizon? Maybe not as an official posting right away, be we Canadians love to bargain with our banks, and if they advertise prime, you can bet there's a homeowner asking for a little better. It's the Canadian way.

It never ceases to amaze me how many people enjoy bragging about their mortgage rates, but fail to do anything productive with it. Allow me use the math to explain. Let's say you have a $200 thousand mortgage with a rate of 4%. I'll give you the benefit of using that low rate for the whole 25 years of your mortgage. Your payment is about $1055 a month, therefore, by the time you pay off your mortgage; you've paid almost $117 thousand in interest.

Okay, someone advised you to go biweekly accelerated. Absolutely fabulous. You're down to about $100 thousand in interest, and mortgage free 3 years sooner.

Why not think the other way? Why not pay as if you didn't get a low rate? The same mortgage at 6% would have a payment of about $1288 a month. So, why not pay the $1288? Not only will you be mortgage free in 18 years instead of 25, you'll save about $35 thousand in interest.

Whenever you buy something "on sale", you're saving money by spending less than the regular price. So, why aren't you saving money when your mortgage is on sale?

Bank of Canada is holding steady on the key rate of 0.25%. It's not very shocking, since the promise was to keep it low until at least June 2010. What is surprising is how many Canadians are breathing a sigh of relief, believing this will keep mortgages at the current record low rates.

If you're one of them, I have news for you. Banks and mortgage companies do what's best for them, not what's best for you. That being said, Canadian lenders have set a precedent by adjusting their rates when Bank of Canada makes a move. It adds to the illusion that the two rates are somehow connected. While the Bank of Canada rate may have some influence on mortgage rates, it really comes down to the banks themselves, and of-course, profitability.

Competition on big-ticket finance lending, such as a mortgage is fierce, and hunger for business, is what's actually keeping mortgage rates down. At some point, one of the major Canadian banks will bravely increase their mortgage rate. When the increase does not result in ruination, the rest will follow the lead.

On the flip side, a little more profit from lending means financial institutions can pay a little more interest on savings accounts. So enjoy the current mortgage rates, just don't get used to them.

The simplest way to establish if you are financially prepared to buy a home is to go through some calculations that will enable you to determine if you are ready to purchase, and what price range you should consider.

First, you must calculate your net worth - the amount you have left when you subtract your debts from your savings. This will help you determine the size of down payment you can afford.

Looking at your monthly expenses will tell you the monthly mortgage payments you can manage. Remember that you have to pay your principle, interest, taxes, and heat (P.I.T.H.). When added up, these should equal less than 32% of your monthly household income, while all your expenses should be less than 40%. By taking these things into consideration, you will get a good idea of what kind of home, down payment, and monthly mortgage payments you can afford.

Although many Canadians may be suffering from the recession, this country has managed to avoid the very difficult situation currently faced by the U.S. housing market.

Recent reports noted that the U.S. economy did not shrink as much as had been anticipated in the second quarter of 2009. While that is definitely good news, the outlook on the housing front is considerably less rosy.

Bloomberg News reported earlier in the spring that nearly 22% of American homeowners owe more on their homes than their homes are worth. The term they use is "underwater". Sadly, that number is likely going to increase. A report on the Business Insider offers a clear, albeit troubling, summary of how debt problems and reduced housing values are affecting Americans.

It seems that housing values in the U.S. have not yet bottomed out. In fact, the prediction is that they will drop by another $3 trillion to $15 trillion, down from about $25 trillion only a few years ago. Of course a drop in value does not mean a drop in money owed. Americans still hold large mortgages, with a a debt-to-value ratio of 80% being common. With loans at that level, all it takes is a 20% drop in value to put a homeowner underwater. With housing values already down 30% and forecast to drop by another 10%, the picture is not a pretty one.

In Canada, on the other hand, house prices are stable and homeowners hold a lot more equity in their homes. The Canadian Association of Accredited Mortgage Professionals (CAAMP) reported in April of this year that the value of Canadian owner-occupied housing stands at around $2.67 trillion, with some 72% if that total being homeowner's equity.

There is no joy in the U.S. situation, and no cause for smugness or gloating here. But Canadians can be genuinely grateful that the terrible situation that continues to plague U.S. homeowners has not taken root here, nor is it likely to.

The Financial Post recently featured an article with the compelling title: "When will interest rates start to rise?"

It is a question that is on the minds of just about everyone these days especially current and prospective homeowners. With interest rates at historic lows, the housing market has been very active across the country. The latest survey from the Canada Mortgage and Housing Corporation (CMHC) shows that 90% of those surveyed believe a home is a good investment, and 70% feel that now is a good time to buy a home. Sales figures reflect this sunny outlook  housing sales in June, 2009 were up 8.7% over May and up 17.9% over June, 2008.

Buyer's optimism is fuelled by the Bank of Canadas (BOC) decision to maintain interest rates at 0.25%, and its promise to hold rates at that level until June of 2010. But can the BOC keep that promise?

It is that question that is at the heart of the Financial Post article. The key factor is inflation. If inflation increases, interest rates could go up. Those who believe that inflation is a real risk are predicting that interest rate increases made in response to inflation will be dramatic.

Of course, many experts hold the opposite view. They believe that because economic growth has been fairly slow, and because there is excess capacity in the economy, there will be less opportunity to increase prices. Wages will also stay in check, as workers scale back wage demands in order to hold onto the jobs they have.

So what's the bottom line for new home buyers? While the predictions by economists that the recession is over and reports about major hikes in home sales bode well, they are not telling us the whole story. Keep an eye on other economic indicators, like the next Stats Can jobless report, due out this Friday. These numbers will tell us a lot about the state of the economy, the likely pace of recovery, and the potential for inflation to increase.

Toronto home buyers were relieved to see mortgage rates reduced today by 0.25%. It is still possible to get a closed 6-month rate of 5.35% (MRS Trust), and a closed 5-year rate of 5.25% (Canadian Tire and Comtech). However, the average 6-month rate is 6.25%, and the average 5-year rate is 6.41%.

Today's rate drop was not as much as expected, but it is probably only the first in a series of decreases likely to occur this fall and winter. The Big 5 Canadian banks departed from their usual practice of automatically matching the Bank of Canada's 0.50% decrease. The prime rates in Canada and the U.S. are now identical, at 4.5%.

The Bank of Canada's interest rate decrease was planned with the United States, China and Europe to restore confidence in the international banking system and encourage spending. It is the first time since the Twin Tower attacks of September 2001 that the Bank of Canada changed its regularly scheduled interest setting to collaborate with other governments. U.S. banks dutifully accepted the lead of their Federal Reserve by reducing their prime rate to 4.5% today. Canadian bankers say they cannot lower interest rates further because money is scarce and it is very costly for them to borrow from foreign banks now. Australian bankers agreed with the Canadians, and also refused to follow their central bank's rate cut. The UK intends to partly nationalize its banks. Mortgage Lenders in Singapore, Hong Kong, Dubai and Mumbai are profiting from western banking problems.

The Bank of Canada next sets its interest rate on October 21. Another reduction is expected. The Bank of Canada has already increased liquidity, made short-term loans to commercial banks, and eased its collateral requirements in a multi-pronged approach to lessening the impact of the American credit crisis here in Canada.

Several Canadian banks hiked their mortgage rates this past week, in response to the U.S. mortgage crisis. Many five-year fixed mortgages are now 7.2%, an increase of 0.35%. However, TD Bank is still offering 5.85%. Government bond rates are usually connected to mortgage rates because the banks obtain funds for mortgage lending through bonds.

For the past several years, there was a steady difference of 2.59 percentage points between the bond rate and the mortgage rate. This week has been an exception - the bond market rallied and the bond rate increased, but mortgages perversely did not follow this optimistic move with a rate decrease. This is due to fears that the U.S. mortgage crisis will spill over into Canada. Canadian bankers want liquidity as protection from the U.S. crisis, so the difference between bonds and mortgages today increased to 4.05 percentage points.

Foreign banks are restricting their lending to Canadian banks, as the world waits for the U.S. Congress to decide on the proposed $700 billion bail-out plan. When money is available, the premium foreign banks charge Canadian banks for borrowing has doubled. We're all hoping Congress will announce its decision on Sunday. How does this U.S. debt crisis affect your mortgage rate this weekend? Let's compare December 2006 with today's rates.

In 2006, the housing market boomed. It was possible to get a five-year fixed mortgage for 6.45% without a mortgage broker. Canadian government bonds yielded 3.85%. Today, the U.S. credit debacle means you will likely pay 0.75% more than you did in 2006 because bonds only yield 3.15%. A conference with your mortgage broker this week will be especially critical for getting you the best possible rate.

There has been much discussion about the Bank of Canada's recent decision not to cut its key overnight lending rate, including the silver lining in this decision. As the Toronto Star notes: "[This] period of stability in short-term rates could actually support the housing market if home buyers take comfort they can safely grab the savings available with variable-rate mortgages."

With prime rate currently hovering around 4.75%, many lenders are posting 5-year variable-rates at 4.2% or lower. Borrowers may be able to negotiate with their lender for an even better rate. In comparison, current 5-year fixed mortgage rates are posted at anywhere from 5.2% to as high as 6.85%.

What does this mean to the average homeowner? Current economic conditions make this a great time to consider a variable-rate mortgage. Even if prime lending rates go up, there are still substantial savings to be had and if the rates go down, you can save even more.

Whether you are purchasing a home or looking to refinance your current home, making an informed mortgage comparison is becoming more critical to get the best available mortgage terms and interest rates.  Today's Globe and Mail reports that General Electric's Canadian mortgage lending arm, GE Money Canada, will stop writing mortgages for the Canadian market effective Thursday. GE's exit from the Canadian mortgage lending stage comes on the heels of recent announcements that both HSBC Financial Corp. Ltd. and Accredited Home Lenders are getting out of the home lending business.

GE's decision to suspend its Canadian mortgage lending operations is not a reflection of underlying problems in the Canadian market, but rather a reflection of the parent company's redeployment of its capital away from consumer financing. (Unlike many other lenders who securitize the mortgages and consumer loans they write, selling the paper to an investment pool substantially reduced by the credit crunch triggered by the collapse of the U.S. subprime mortgage market, GE funded mortgages from its capital resources and kept the loans on its own books.) GE's decision to terminate its Canadian mortgage business "was precipitated by the credit market turmoil, and the need to deploy capital more effectively," says Stephen Motta, chief executive officer of GE Money Canada said.

Canada's mortgage and housing market is quite different and markedly healthier than markets in both the U.S. and the U.K., where Britain's housing market is taking a pounding similar if not as marked to that in the U.S. while its own speculative housing bubble unwinds. Today's Financial Times, Britain's leading financial paper, ran a must-read article analysing the key differences that have helped Canada avoid the housing and mortgage problems that have plagued both the U.S. and U.K.

With the exit of GE, HSBC and Accredited Home Lenders, the pool of competitors to the Canadian banks and trust companies that finance the majority of Canadian mortgages is somewhat smaller, taking some competitive pressure off of the rates and terms offered by traditional lenders. Yet for prudent home owners and purchasers, there remains a large pool of alternate lenders offering competitive mortgage terms.  Using a well-resourced mortgage broker to compare the terms and rates offered by the array of public and private lenders simplifies mortgage comparison and is likely to reward the savvy consumer with better rates and terms than could be negotiated solely be comparison shopping mortgages between the major banks.

Where are Canadian mortgage rates headed? And when?

Headlines in the papers are showing that inflation is creeping ever upwards, with the Consumer Price Index topping 3.1 per cent this month on its way to a forecast 4.1 per cent in the new year.  While the Bank of Canada has acknowledged its concerns about the economic dangers of heightened inflation and readjusted its projection for domestic inflation, it focused only on the "core inflation rate" in its latest forecast.

A Monetary Policy Report Update was released by the Bank of Canada following its July 15th announcement that the central bank's key overnight lending rate would remain at 3% - for now. It forecast that total Consumer Price Index inflation would rise temporarily above 4 per cent, peaking in the first quarter of 2009 as energy prices stabilize. However, the "core inflation rate" relied on by the Bank of Canada in its latest interest rate decision excludes gasoline prices which have increased 26.9% since last June. The Bank of Canada's reasoning also optimisitically predicts energy price stability in 2009, which right now seems to be a questionable proposition.

At CIBC World Markets, their latest "Interest Rate and Exchange Rate Forecast" predicts that soaring oil prices will soon pressure the Federal Reserve to raise interest rates in the United States, where inflation is already running at a 4% clip. "Best bets for the first move are right after the November election," according to CIBC's economists. They expect that the Fed will hike U.S. interest rates by 2% by the Autumn of 2009 "even if it means leaving the (U.S.) economy growing at a slow crawl." CIBC expects a somewhat later tightening of Canadian interest rates by the Bank of Canada, but notes that both inflation and interest rates will be headed higher.

As gasoline prices increase, added fuel costs are passed on to all manner of consumer products, from food to household goods adding to inflationary pressure. "We look for food inflation to reach 3-1/2% next year as shipping costs add to price pressures," writes CIBC economist, Avery Sheffield ("Canada Loses its Inflation Exemption"). As the dramatically higher price of gasoline, and therefore shipping, is passed through to the broader economy, even the "core inflation rate" will be affected, forcing the Bank of Canada to account for the real price increases consumers are dealing with.

With a buyer's real estate market in most centres and mortgage rates still relatively low, sooner rather than later may be the best time for Canadian home buyers and homeowners who are looking for the best rates for mortgage financing or refinancing. The Bank of Canada is next scheduled to review its benchmark-setting overnight lending rate on September 3rd, when Canada's central bankers will once again look at the pressures on our economy from inflation led by the rapid hike in gas prices. Although, the consensus feeling seems to be that the Bank of Canada wants to leave interest rates where they are to spur growth, more bad news on the inflation front may force the central bank's hand earlier than expected, leading to an interest rate hike in the autumn rather than in early '09.

Canadian mortgage rates are holding steady - at least for now. The Bank of Canada meets again on July 15th to figure out what, if any, adjustment needs to be made to the interest rate it charges to Canadian banks and financial institutions in order to guide Canada's economy through the leftover remnants of the U.S.-induced credit crunch and spiraling world oil prices. Bank analysts are predicting that Canada's central rates will be unchanged when the Bank of Canada meets again in two weeks' time to adjust its lending rate, if necessary.

"Inflation pressures have reasserted themselves, domestically as well as internationally, forcing policymakers to readjust their interest rate sights," notes the Scotiabank Global Research Group's June 27th Forecast Update. However, Scotiabank is predicting that the central bank's interest rates will remain unchanged on July 15th. Canada's central bank decided not to drop its main overnight lending rate on June 10th, as industry insiders had expected, in order to stave off growing inflationary pressure. Most analysts are expecting that this will be the extent of the Bank of Canada's move to fight off inflation - at least for this summer. In the longer term, most analysts are predicting that the central bank will return to a 'more accommodative monetary policy' later this year - i.e. by year's end it will again cut its lending rate in order to support an economy that has so far fought off an economic recession - unlike our largest trading partner, the United States.

Scotiabank's Global Economic Research Group is predicting that rates are not going to go up when the Bank of Canada meets in mid-July, and that by the year's end, the Bank of Canada will once again be seeking to lower rates in order to provide economic stimulus to the economy.

"Our forecast suggest that weakening economic growth should eventually curb the run-up in inflation," according to Scotiabanks' latest trend assessment. It predicts that both the U.S. Federal Reserve and the Bank of Canada "are likely to remain cautious for the foreseeable future, and keep their bellweather overnight interest rates steady", but that rates will likely be lowered to fight increasing economic difficulties in North America around the end of 2008.

Canadian mortgage rates may well have bottomed out and are likely at their lowest point for this economic cycle.  In a move that can hardly have been surprising, given the publicly expressed concerns of the G7's central bankers over the spectre of inflation, the Bank of Canada announced that it would leave its main overnight rate unchanged at 3%.  (The BofC's overnight rate is the benchmark interest rate which banks, credit unions, caisses depots and other financial unions principally use to set their mortgage and other prime lending rates.)

As predicted last week, the Bank of Canada opted "to let sleeping interest rate dogs lie" in order to gauge the impact that soaring energy prices and sharply rising commodity prices on world markets will have on the Canadian economy.  It is likely, particularly given the most recent comments of U.S. Federal Reserve Chairman, Ben Bernanke, about his inflationary worries, that we have reached a bottom in terms of historically low mortgage rates for this business cycle and as increasing inflationary pressure from energy and commodity prices build, interest and mortgage rates will drift higher. 

The Canadian business adage is, "When the U.S. sneezes, Canada catches a cold,"  although (thankfully) this hasn't been the case as Canadians witnessed the meltdown of the U.S. housing market - credit for which is due primarily to the much tighter regulation of Canadian financial markets and a conservative banking and investment culture.  Yet, given the closest of ties that we have with the U.S. in one of the world's largest two-way trading partnerships, wherever U.S. rates go, Canadian rates are apt to follow.

"The latest round of increases in energy prices has added to the upside risk to inflation and inflation expectations," Mr. Bernanke said in a speech yesterday.  Following on the reversal of the U.S. market consensus which had anticipated a cut in the U.S. Federal Reserve's rate, but now anticipates a marginal increase in U.S. lending rates by year end, it seems more than likely than not that Canada's main rate (and, hence, Canadian mortgage rates) will be headed up when the Bank of Canada re-examines its rates next time.

The news that the Bank of Canada opted not to cut its main rate, together with economic signals coming out of the U.S. indicating their current financial woes may have bottomed out and could be on the upswing - continuing low interest rates, improving market conditions, and a slow easing of problems in the U.S. housing market - could make this the opportune time for Canadians in search of the best mortgage rates to move on the home purchasing or home refinancing decisions they have been weighing.

The direction of Canadian mortgage rates - whether they are going up. down or will remain stable - in the near future will be decided June 10th when the Bank of Canada reconvenes to determine whether to tweak its main rate.  (The Bank of Canada's main rate establishes, in part, how much it costs financial institutions to borrow money and is the benchmark banks, credit unions and other financial institutions use to determine the prime lending and mortgage rates they offer their customers.)

Speculation was that the Bank of Canada would lower its main lending rate moderately, perhaps dropping it by a basis point or two (perhaps .1% or .25%), but that it would not make a large cut like the .5% rate cut that came our way at the end of April.  Now that industry speculation is being called into question, however, as central bankers - particularly the head of the powerful U.S. Federal Reserve - wrestle with the spectre of inflation sparked by soaring global energy and commodity prices.

Today's Financial Post reports that U.S. Federal Reserve Chairman, Ben Barake, meeting with other G7 central bankers at a monetary policy conference in Spain, has signalled that he is increasingly concerned about inflationary pressure on a U.S. economy that is still reeling from restructuring and the effects of the global credit crisis brought about by the collapse of its sup-prime mortgage and housing markets.

Central bankers are "very much aware of ongoing inflationary pressures," according to Michael Woolfolk, senior currency strategist at Bank of New York Mellon.  "The G7 in general now are looking to begin raising rates to fight inflation once the current financial crisis subsides," and the after-effects of the liquidity and credit crunch triggered by ongoing turmoil in U.S. markets have been dealt with.

"The change in tack," from lowering rates in order to bolster liquidity to raising rates in order to combat inflationary pressure, "may put the Bank of Canada in a bit of a bind" notes Financial Post business writer, Jacqueline Thorpe. "If it cuts rates as many expect next week just as other central banks turn more hawkish, the loonie could drop and an inflation shield could be removed," according to CIBC World Markets' senior economist, Benjamil Tal.

It seems questionable now, given the recent spikes in gas and energy prices, whether the Bank of Canada will go ahead with any rate cut, however moderate. More likely, the BofC will opt to let sleeping interest rate dogs lie. In the longer term, however, Candians can expect interest rates to climb from their current low levels. Those shopping for competitive mortgage rates should be talking to their mortgage broker or financial advisor to determine if now is the time to lock in to the current low rates lenders are offering - before the Bank of Canada announces whatever changes to interest rates it may have up its long, central banker's sleeve.

Rookie Bank of Canada Governor, Mark Carney, gave his first major speech outside of Canada on Friday when he addressed the Harvard Club in New York.  Not surprisingly, his address raised speculation about which direction Canadian mortgage rates are likely headed in the near future.

Talking about the need for central banks to have more direct influence on lending markets in the wake of the global "credit crunch" brought about by the collapse of the U.S. sub-prime mortgage market, Gov. Carney made a pitch for central banks to work together to address situations where there is too much liquidity - i.e., money available on the global financial markets for banks and other financial institutions to lend to us - as well as too little.

Importantly, Gov. Carney is now sounding "bearish" on the subject of whether or not Canadians can expect further cuts to the Bank of Canada's main lending rate - the benchmark banks, credit unions and caisses populaires use to set their variable rate mortgage and other lending rates.  The National Post reports Gov. Carney as being "tightlipped about whether the Bank of Canada was inclined to make further interest rate cuts."  The NP reports Canada's rookie central banker as saying the recent surge in oil and other commodity prices would have to be factored in when the Bank of Canada reconvenes in June.

"Where speculation was that we could expect some further marginal cuts to  the BofC's main rate," says the National Post, "it now sounds as if Gov. Carney is backing off that position in wake of soaring energy and commodity prices."  If considering whether to lock-in your variable rate mortgage at the currently low rates before any possible rate hikes, now rather than later would appear to be the time to get in touch with your mortgage broker and get the research and legwork done.