Mortgage Rates & Mortgage Broker News in Canada

Retracement in 5-year Bond Yields

The 5-year bond--which is normally correlated with fixed mortgage rates--has had a massive rally over the prior three months.  Its yield, as always, has moved inversely (down in this case).

Now, technical analysts are likely looking at the chart above and calling for a correction higher.  For those into esoterica, pattern watchers term this a 2B reversal.

To most this is hocus pocus, especially to academia.  We never advise clients based on this kind of stuff.  There is always the possibility or rates collapsing back down and making new lows.

That said, some traders believe strongly in these types of patterns.

(Chart data from the Bank of Canada)

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Sidebar:

There are fundamentals driving yields higher as well.  Bond expert and InYourBestInterest.ca host, Hank Cunningham, says "one of the fallouts of the budget will be a record issuance of Federal bonds this year, some $82 billion." Moreover, the US treasury is issuing an astronomical $2.5 trillion worth of its own notes and bonds this year.  New supply typically has an upwards influence on bond yields.

BoC Chief Says Canada Will Ride Out the Storm

Sound bytes from the Bank of Canada's Mark Carney, from a speech he gave yesterday:

• "The Canadian economy is expected to begin recovering later this year."
• "...cutting the policy rate by 350 basis points since December 2007...with the usual lag...will have a powerful impact on economic activity and inflation."
• "Since the easing cycle began in December 2007, we have lowered the overnight rate by 350 basis points. The prime rate has fallen by 325 basis points, Bankers Acceptance rates (key short-term financing instruments for corporations) have fallen by about 380 basis points, and variable rate mortgages by about 185 basis points."
• "Our focus is clear, our actions consistent, and our objective explicit: 2% CPI inflation."
• "The Bank has taken into consideration the higher risk premiums demanded in today's markets in setting its overnight rate. As well, it has taken into account the effect on future Canadian inflation of the lower level of foreign demand that has resulted, in part, from financial difficulties in other countries. The policy rate is lower than it otherwise would be in the absence of these difficulties."  [CMT: As a result, rates may move up quickly once the economy heats up again...whenever that will be]

Liberals Will Vote for Budget with Conditions

Liberal Party leader Michael Ignatieff wants the Conservatives to check in with parliament regularly to report on the budget's costs and impact.  Given that, his party will support it, he says.  (Financial Post)

2009 Federal Budget Announced

And what a budget it is for the real estate industry. 

The Tories reached into the goody bag and pulled out:

• A $5000 increase to the RRSP Home Buyers Plan, meaning first-time home buyers can now withdraw up to $25,000 from their RRSPs for a down payment--tax and interest-free.
• A $750 tax credit for first-time home buyers to help with closing costs, such as legal fees, disbursements and land transfer taxes.
• A 15% tax credit of up to $1,350 on eligible home renovation expenses undertaken before February 1, 2010.
• $300 million for ecoENERGY Retrofit grants.
• Up to $50 billion worth of additional mortgage buybacks. The government called this a "successful program" that "will reassure lenders that stable long-term financing will continue to be available..." (See sidebar below)
• More "disclosures" for mortgage insurance designed to "help consumers better understand the mortgage insurance transaction. The Government will also propose new measures to ensure that Canadian consumers are charged no more for mortgage insurance than the true cost of obtaining that insurance."

Liberal chief Michael Ignatieff is expected to announce whether the Liberals will support the budget today at 11am ET. Pundits expect him to back it, albeit hesitantly.

The New Democratic Party and Bloc Quebecois have already vowed to vote it down.

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Sidebar:

The government had this to say about the Insured Mortgage Purchase Program (IMPP) in its budget announcement:

As the mortgages that will be purchased already carry government backing, they represent no additional risk to the taxpayer. The competitive auction process used to purchase the mortgages is also designed to protect taxpayers by ensuring that the rate of return on the purchased mortgages exceeds the Government’s cost of borrowing. As a result, the IMPP program will continue to earn a positive financial return for the Government while at the same time filling a key gap in financing markets. The program has facilitated a reduction in prime and mortgage rates since its introduction.

IMBA Annual Conference Targets Financing in a Tight Market

The Independent Mortgage Brokers Association of Ontario (IMBA) is hosting its Annual Conference and Trade Show on April 2nd and 3rd, 2009 at the Toronto Congress Centre.

The event, entitled “Mission: Possible,” will focus on solutions to assist consumers in finding mortgage financing in a tight money market.  Over 700 mortgage professionals are expected to be in attendance.

President of IMBA, David Mandel, says, “The opportunity for our Membership to come together and renew and refresh their knowledge on lender offerings is vital for ongoing professional development.” He says the event will feature several value-added events including:

• The annual Trade Show, featuring over 50 mortgage lenders and industry suppliers
• A presentation by Patricia Arsenault, Executive Vice President, Altus Group, who will provide real-time economic data and explain how the current conditions are affecting the housing market.
• Mortgage-related seminars, including: “Compete to be Unique” by Richard Robbins and “Fraud and Consequences” by Jerome Mayne
• Panel discussions on technology, packaging commercial mortgage transactions and construction financing

In addition, IMBA is sponsoring the SickKids Foundation with a Charity game that will award a fully loaded, 2009 Pontiac G3 SE to one lucky delegate in attendance.

Founded in 2001, IMBA’s membership is comprised of over 1,700 mortgage practitioners, originating some $10 billion in mortgage funding annually.

For more information and to register for the conference, please visit www.imbaconference.ca

As a side note, IMBA’s conference happens to coincide with the CMP Mortgage Awards, for those who want to attend both events.

Big Bounce in Bond Yields

5-year bond rates have spiked up quite a bit in the last 12 days.  The 5-year Canada yield has jumped 4/10% from its long-term low of 1.52% set on January 14.

Part of this is due to unexpectedly positive economic news, part is a reaction to the increasing supply of bonds on the horizon, and part is bond traders taking profits after one of the biggest bond rallies in recent memory.

The move has many now asking if yields are at some kind of bottom.

Research suggests that rate prediction is futile, but people are still taking note because of the correlation (historically anyway) between bond yields and fixed mortgage rates.

In absolute terms, bond yields have come down A LOT.  Check out this chart of the past few years.  The y-axis on the left is the percentage yield of the 5-year government bond.

Longer-term, bond yields have come down even more.  This chart of 5-year yields over the last decade shows just how far we've dropped.

A lot of trader-types think yields could retrace (i.e.  go up) at least a point or more, especially if the economy appears to be recovering faster than expected.  (Again, take that for what it's worth--we don't predict.)

If you're a mortgage shopper worried about the potential of that happening, then today's fixed rates (under 4.50% on a 5-year and under 4.00% on a 3-year) look pretty appetizing.  Fixed mortgage rates are basically at, or near, all-time lows.  Meanwhile variable-rate mortgages are hovering around 3.75% to 4.00%. 

That minimal difference between fixed and variable rates seems to have captured homeowners' attention.  We, for one, have seen a noticeable increase in homeowners wanting to lock in as of late.

Genworth & AIG Push for 100% Guarantee

There are three mortgage default insurers in Canada.  CMHC is the biggest and it is 100% backed by the federal government.  Genworth and AIG are #2 and #3 respectively, and are only 90% backed. 

As a result of this difference in guarantees, a lot of lenders (and lenders' investors) prefer CMHC, because the perceived risk is less.  Genworth and AIG feel it's time to level that playing field.

As the Globe reported this week, Genworth and AIG want the finance department to guarantee their mortgage insurance 100%, just like it does for Crown corporation CMHC.

Genworth and AIG say the risks to doing so are remote.  Not only are their underwriting standards prudent (basically the same as CMHC's), but they contribute to a guarantee fund and maintain reserves--as required by law--to offset any losses.

On the upside, a 100% guarantee for Genworth and AIG would mean more insurer competition, more new mortgage products, and lower insurance fees for Canadian homeowners.  Default insurance is required for most borrowers with down payments under 20%.

We'll see if Tuesday's federal budget makes any mention of new insurance guarantees.

Canadian Mortgage Awards 2009

The mortgage industry’s biggest annual awards night is right around the corner.  CMP’s third annual Canadian Mortgage Awards gala will take place this year on April 3 in Toronto.

There are 18 categories in all including three new awards for best BDM, best underwriter, and best community service.

This year, CMP’s new online nomination form makes it easier than ever to vote for your favourite candidate.

All nominations must be submitted by February 2.

3-year Fixed Mortgages

There are some amazing deals right now on 3-year fixed mortgages.

In some cases, like with Merix Financial's latest promotion, they're at or below most 1-year and variable rates.  That doesn't happen very often.

3-year mortgages seem to be the oft forgotten term, though.  Only 5-10% of people get them.  People tend to gravitate to 5-year terms instead--which are favoured by 61% of Canadians. 

That said, the research suggests that 3-year terms may be worth a deeper look.  For one thing, CAAMP data shows that folks get a new mortgage, roughly speaking, every 3 1/2 years.  So a 5-year term, in this case, is adding little value.

Furthermore, history has shown that shorter terms tend to save borrowers more interest over the long-run because of the bigger rate premiums built into longer-term mortgages.  In general, the more frequently you can negotiate your mortgage, the greater the likelihood you'll get the best possible deal.

Therefore, if you're looking at options for your next mortgage, consider if it's worth paying 1/2%-3/4% more for the two years of extra certainty built into a 5-year fixed.  (For some homeowners it is)  Otherwise, at the current rates, a 3-year may just be your cup of tea.

Mortgage Job of the Week

This week's featured mortgage career... 

 

Company:  Xceed Mortgage Corporation
Position:  Marketing Associate - Toronto
Location:  Toronto, ON

Click on the position title above for more information. 

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Advertise your mortgage job opening now!  Click here to post. 

Or browse CMT's Mortgage Jobs Database.

What Next?

There's been big changes to fixed mortgage rates in the last 24 hours.  As a result of this and the BoC announcement, mortgage professionals are probably getting more calls today than they have in weeks. 

Mortgagors and mortgage shoppers alike are anxious to know:  "What now?"  "When should I lock in?"  "Where is the bottom in rates?"

The latter is the most common question we seem to be getting.  In answering it, we're no better off than anyone else at predicting where rates will go next.  Almost anything seems possible in the credit market these days. We've seen U.S. treasuries trade at negative yields and Japan cut their policy rate to 0.1%.

Despite this and the outside possibility of Canada's overnight rate going to 0% (this is not a prediction), we feel safe in saying that prime rate and fixed rates are not destined for anywhere near 0%, or 1%.

Banks have already shown hesitancy to lower prime and funding cost are still above normal. Therefore, a 0% overnight rate might bring prime down maybe 0.50% to 1.00% more, tops (as a very rough guess). Most economists seem to predict 1/2% more max.

Whatever the case, consider your probabilities of success by basing an interest rate strategy on the "hope" that rates fall further. If billion dollar bond fund managers can't consistently predict turning points in rates, what chance do normal folks have?

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Sidebar:  In case anyone's interested, here's an empirical study of how bond fund managers do against their benchmarks. Quote from the study:  "Among fixed income funds, indices outperformed twelve of thirteen categories over a five-year horizon."  It's tough to predict rates!

(Thanks to Seeking Alpha for the link on this study.)

Prime vs. the Bank of Canada

Here's a view of how prime rate has moved over the last 10 years, as compared to the Bank of Canada's overnight target rate.

We're clearly in uncharted territory, and not far off from the bottom.  Yet, some economists are nonetheless calling for another 1/2% cut to prime. 

Click chart to enlarge.

(Date source: Bank of Canada)

Rate Frenzy

TD just announced some excellent fixed rates of its own.  Hat's off to them for quickly countering RBC and BMO's new specials.

Lenders now seem to be jockeying for position given all the rate announcements today.  There will likely be several more rate changes throughout the remainder of the week.

In the meantime, two quick reminders:

1. As we convey here often, rate isn't everything. Compare a mortgage's features and restrictions in depth before applying.
2. Shop around, or better yet, use the free services mortgage professional who can compare all the terms out there and has access to various unadvertised rate specials.

Posted Rates Coming Down...Finally!

Lenders have kept posted mortgage rates higher than normal for months.

Now RBC has announced the biggest cut to posted rates that we've ever seen.  The posted rate on their 5-year fixed mortgage is falling almost one percent (0.96% to be exact).  The rate change takes effect tomorrow.

This is the biggest posted reduction from any bank in at least 10 years.  Prior to this the biggest cut to 5-year posted rates was 0.34% last May.

RBC also announced 1-3-year rate reductions and a slew of new rate specials.  These rate specials reinforce the trend in big banks getting ultra-aggressive as of late.  This will no doubt put pressure on other lenders to catch up with falling bond yields and cut themselves.

Regarding variable-rate mortgages, there hasn't been much news on spread changes thus far.  The only thing we've seen is a few lenders increasing from prime + .60% to prime + .80%.  Most likely this is due to margin compression as a result of the reduction in prime rate.

As always, the best deals can change daily.  Consult a mortgage professional and ask him/her to compare the best deals from all lenders.

BMO Matches BoC Rate Cut

BMO wasted no time today in becoming the first big bank to announce it was lowering its prime rate by 1/2%.

BMO's press release came out just 2 minutes after the Bank of Canada's 9:00am ET announcement.

RBC, TD, CIBC, and Scotiabank followed a bit later in cutting their prime rates to 3.00% as well.

The move will naturally be applauded by borrowers.  Canadians started a virtual riot the last time big banks didn't match the BoC's rate cut in December.

In BMO's case, the news may be tempered somewhat due to the recently reported increase in its line of credit rates.  However, BMO's cut set the tone for the rest of the market so that's a positive.

Canada's Key Rate Drops 1/2%

The Bank of Canada has trimmed it's overnight target rate by 1/2%.  That puts it at 1.00%, an all-time low.

There were various points of note in the BoC's official statement:

• Canada is now "in recession" says the Bank.
• Our economy has worsened since the BoC's last meeting in December.
• Canada's economy should continue to retract through mid-2009.
• The Bank expects GDP to drop 1.2% in 2009 (the first annual drop since 1991) but rebound by a vigorous 3.8% in 2010.  It calls for a return to normal 2% inflation by the "first half of 2011."
• The Bank expects "modest decreases in housing prices" through 2009.
• There are "signs" the global financial system is improving.
• The Bank underscored that "low, stable, and predictable inflation" is its main objective, and that it will "monitor carefully economic and financial developments in judging to what extent further monetary stimulus will be required."

The Bank of Canada has now cut rates by a total of 3.50% in the last 13 months.

The Bank's next scheduled interest rate announcement is March 3.

We'll be back later today to report on any movement among the big banks' prime rates.

Anticipation Mounts Ahead of BoC Announcement

Rarely has there been this much buildup before a Bank of Canada rate meeting.  You can just sense how variable-rate mortgage shoppers and mortgage holders alike, are waiting and hoping for a big cut.

If the “experts” are right, they may get it.  According to 19 of 20 economists surveyed by Bloomberg, the Bank of Canada will cut Canada’s key interest rate to an all-time low of 1% on Tuesday (Chart).

If the BoC comes through, the focus will quickly shift to the big banks.  They refused to reduce their prime rates to match the BoC’s 3/4% rate cut in December, and may do the same this time around.

We’ll know very soon…

Rates and the Bank of Canada

For many it's hard to understand why lenders aren't lowering interest rates more.  They read stories about the Bank of Canada chopping rates to an all-time low and wonder why banks are being so darn greedy.

For many, it's due to a misconception that banks borrow from the Bank of Canada to fund their mortgages.  For the most part, they don't.  The Bank of Canada's overnight rate might be 1.50% at the moment, but lenders are paying far more than that for the money they lend out as mortgages.

Many 5-year fixed-rate mortgages, for example, are based on the Canada Mortgage Bond, which was last issued at 2.70% in December.  But market rates are always changing, so lenders have to project where future rates will be when calculating their cost of funds.  They also have to add in risk premiums, intermediary costs, hedging costs, and some kind of profit margin.

It all adds up.  Fortunately, however, the trend for rates has been lower as of late. In addition, lender profit margins are under a lot more pressure today due to all the competition out there.

BMO LOC Rate Increases

In early October, banks began charging premiums above prime rate for variable-rate mortgages and lines of credit.  But, the increases only affected new customers.  Existing customers were safe.

Then, a few days later the Bank of Canada lowered rates and Manulife stopped tying it's popular "One" mortgage to prime.  That move affected all of their customers and created a mini-firestorm for their PR department.  Angry customers quickly lashed out online.

Now, according to the Globe & Mail, BMO is sending letters to existing customers with lines of credit to tell them their interest rate will be rising by 1%.  The increase is due to escalating capital costs says the bank, and reportedly affects customers who got lines of credit before October 15.

Is this a trend?  Will other banks follow this move?  Craig Fehr, an analyst with Edward Jones, thinks they might. 

Fehr says, "I think we'll see the rest of the competitors follow suit in some fashion...I think this is going to be the first of many product lines that will get repriced."

National Bank analyst, Robert Sedran, explains why:  "Since the banks depend on deposits for much of their funding, if you reduce prime without being able to reduce deposit rates by the same amount, the margin gets squeezed...Increasing the borrower's spread to prime restores some of that lost profitability. You could see more of that behaviour if interest rates continue to fall."

With economists expecting the Bank of Canada to cut rates 1/2% on Tuesday, all eyes will be on the banks to see how they'll react.  If the BoC's key lending rate drops 1/2% but the banks cut prime only 1/4%, it may create quite a ruckus.

Regarding the line of credit rate increases, most lenders are already at prime + 1.00% for new business.  Customers who got lines of credit before October 2008, however, are still generally paying prime rate.  As a bank, it's almost a no win situation, with essentially two scenarios: a) Hold rates, thus giving up profits or operating at a loss; or b) Raise rates and risk losing customers to lower-cost competitors.

In this day and age, with bank shareholders so unrelenting and loyalty to lenders so minimal, scenario B is probably the most likely outcome.

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Source of quotes and BMO news:  Globe & Mail  (Hats off to the Globe for an excellent story)

Rate Watch

If you’re a well qualified mortgage shopper hunting for a fixed rate, you’re probably pretty happy right now. 

5-year bond yields (the basis for 5-year fixed mortgages) hit another record low today:  1.52%.

In keeping with the drop in yields, we’ve been seeing a lot more lenders cut their fixed rates.  The very best 5-year fixed rates are now lower than 80% of variable rates at the moment.  That doesn’t happen too often.  (Note to lenders:  Good luck selling prime + 1% variables)

Interestingly, despite bond yields dropping almost 4/10% in the last four weeks, the big banks are keeping their posted rates abnormally high.  Instead of lowering them, banks are talking up their “discounts" off posted rates.  That’s made posted rates almost useless as an indicator for most people.  (Seriously. Does anyone give any weight to a bank’s posted rates nowadays?)

Regarding variable rates, we’ve seen no rate drops (increased discounts) lately. 

Meanwhile, 30-day bankers' acceptance (BA) yields--which often lead variable-rates--hit a record low of their own on Tuesday:  1.08%.  That’s down 1/2% in the last four weeks—the same amount that the market expects the Bank of Canada to cut on January 20.  Derivatives traders are betting accordingly.  They’re now pricing in a “100%” chance of a 1/2% rate cut in five days, and a 73% chance of a 3/4% cut.  (Source: CEP)