Mortgage Rates & Mortgage Broker News in Canada

CMHC’s 2010 Canadian Housing Observer

CMHC just released the 2010 version of its flagship publication, the Canadian Housing Observer.

Here’s a rundown of its mortgage-related data (our comments in italics)…

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Housing’s Economic Impact

• Housing-related economic activity was $307 billion last year—about 1/5 of Canada’s GDP
• Real estate comprises over 40% of Canadian household assets

Mortgage Debt

• Mortgage payments were 33% of average disposable income in Q4 2009, not far from the 31% historical average
  
  This ratio changes when rates and home prices go up and down.

Home Equity

• The average Canadian homeowner has 74% equity versus just 43% for U.S. homeowners
• 60% of Canadian homeowners have a mortgage.
• 80% of mortgagors have at least 20% equity
• 9% of mortgagors have less than 10% equity
• 18% of homeowners withdrew equity in the 12 months leading up to Oct. 2009, down from 22% in the prior year

(Click to enlarge)

Mortgage Brokers

• Mortgage brokers originated 38% of new mortgages in 2009

Recent insider estimates suggest broker share is in the 20-25% range today as banks grow their sales forces and the rate wars intensify.

Mortgage Funding

• 60% of mortgages are funded through deposits
• 32% are funded through mortgage-backed securities

CMHC says: “The majority of the securitization funding done by Canadian banks is through government-backed programs where mortgage loan insurance is mandatory.”

• 8% of mortgages are funded via other means, including covered bonds
• The Canada Mortgage Bond (CMB) market grew 7.8% in 2009 to $175.6 billion

Miscellaneous

• Allocation of outstanding mortgage credit:
  • Chartered Banks: 48%
  • NHA Mortgage-backed Securities: 30%
  • Credit Unions: 13%
  • Other (Finance companies, trust co., life insurers, etc.): 9%
• Mortgages by type of dwelling
  • Single-detached properties: 70.7%
  • Multi-family dwellings: 29.3%

Source:  CMHC

The Devil In The Fine Print

Mortgages sometimes have costly or irritating restrictions that you won’t know about unless you read the fine print or ask a mortgage professional.

Some examples:

• Restrictions on breaking your mortgage before the term is up
• Restrictions on breaking your mortgage for the first 3 years
• A penalty surcharge of 1% for mortgages broken within the first 12 or 36 months
• “Reinvestment fees” (on top of mortgage penalties)
• Interest rate differential (IRD) penalties based on an onerous bond yield calculation
• IRD penalties on variable-rate mortgages (usually IRD penalties apply to fixed mortgages)
• IRD penalties based on a costly posted vs. discounted rate formula
• Inability to port unless the purchase and sale take place on the exact same day (which can be hard to arrange)
• A poor conversion rate guarantee
• No refinances during the first year
• No free switches (for transfer-eligible mortgages)
• Amortization limits of 25 years
• Minimum amortizations of 15-18 years
• Restrictions on converting from a variable rate to a fixed rate for the first six months
• No ability to break your “open” HELOC without a penalty
• No pre-payments within 30 days of discharge
• Inability to port across provincial lines
• High administrative fees when porting
• 100% clawback of cash-back if the mortgage is broken before maturity
• Requirement for a full banking relationship with the lender
• No lump-sum pre-payment privileges
• No annual payment increase allowance
• Pre-payments restricted to one specific day a year (instead of any payment date)

And the list could go on…

Keep a lookout for restrictions like this when comparing different mortgages.

It’s even more important when sizing up cut-rate mortgages because the lower the rate, the greater the likelihood that a mortgage will be somehow restricted.

Profiling Achievement: Mortgage Brokers Ottawa

From time to time, we’ll be profiling highly successful broker teams across the country. The goal is to see what makes them tick and get their sense for where the industry is headed.

One team that’s had tremendous success the past few years is Mortgage Brokers Ottawa (MBO). MBO’s team of 40+ agents is tracking to top $700 million in volume this year. That puts them probably in the top five broker teams in the country.

We chatted with Michael Hapke recently for a glance into MBO’s business. Mike was an 18-year bank veteran and branch manager who is now a Managing Partner at MBO, along with Jeff Cody, Frank Napolitano, and York Polk.

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On MBO’s biggest competitors…

“Because of our size and advertising we're competing against the banks, not other brokers. The way we see it, other brokers help raise the profile of the brokerage industry as a whole and that’s a good thing.”

On why MBO chose Mortgage Centre…

(MBO moved part of their business to Mortgage Centre earlier this month. Prior to that it was fully independent, and before that it was a founding broker partner with a national brokerage.)

“We looked at many different brokerage models to see what was out there. Nothing really appealed to us or offered us any further competitive advantage. Staying independent was fine with us. In the end, we asked ourselves, ‘How do I match the banks more often and get more products, other than being part of a traditional bank?’ There was no one that had anything to offer us in this respect other than Mortgage Centre Canada. MCC gives us access to proprietary products, including CIBC branch products like the cash-back switch, 1-year construction rate hold, credit lines in second position, etc.”

On MBO’s volume target…

“MBO’s annual goal is $1 billion in funded volume by 2011. We use a centralized underwriting model to aggregate volume and do our best to hit top tier with as many lenders as possible. Sometimes we have two submission agents per lender. Among other things, this strategy sometimes helps us maximize compensation and lender status.

On MBO’s promotion strategy…

“We do a lot of TV, radio, and wrapped vehicles…not a lot of print though. Our main focus has been on building a strong SEO (search engine optimization) program. We’re typically ranked #1 for our keywords.”

On MBO’s Internet strategy…

“Our plan is to go cross-country and we’ll be launching a national website in the near future. At the same time, we’ve realized we don’t want to manage more people. Our model is essentially to optimize websites with generic local domain names and then hand off leads to our partner brokers who are licensed in that province. We have hundreds of domain names reserved for this purpose.”

Interest Rate Catalysts

We’ll likely see no further Bank of Canada rate hikes till spring, and probably no more US rate increases "before 2012..."

That summarizes Desjardins’ interest rate call from its latest Economic and Financial Outlook.

Yves St-Maurice, Desjardins’ Director and Deputy Chief Economist, elaborated on that view, and provided some excellent background on factors which shape the direction of Canadian interest rates.  If you’re a student of interest rate behaviour, this interview is worth a read.

See:  Yves St-Maurice Interview

Pre-paying A Readvanceable Mortgage

Most people would love to pay down their mortgage quicker if they could.

Making pre-payments generates one of the best returns on your money, for two reasons:

1. There’s no risk
• You’re guaranteed a return without losing your principal.
2. Taxes are due on interest you earn, not on interest you save
• As a result, the effective after-tax rate of return on a mortgage pre-payment is pretty decent.
• Example:  Pre-paying a 3.99% mortgage in a 40% tax bracket is like earning 6.65%, risk-free.

Yet, many people won’t use their spare cash to pre-pay their mortgage, for fear they might need that money down the road.

That’s supported by a recent Manulife Bank survey that suggests nearly half of Canadians would consider pre-paying their mortgage if they could “easily access that money again, should their needs change.”

One way to do that, of course, is with a readvanceable mortgage.  A readvanceable lets you re-borrow paid-down principal any time you need it, up to your approved limit.

In a readvanceable, your “limit” is the total borrowing your lender approves you for, including both your mortgage and line of credit.

Readvanceables are available to well-qualified borrowers who have at least 20% equity in their home.  If you can get a readvanceable for a similar rate as a regular mortgage, it’s worth considering.  Having the benefit of liquidity can be priceless if a need arises later for low-cost funds.

Just remember two things if you’re considering a readvanceable:

• Readvanceable mortgages make it easy to spend, so be sure you’re disciplined enough not to blow the line of credit on discretionary spending.
• If you move a readvanceable mortgage to a new lender at maturity the mortgage must be re-registered. That means you’ll often need to pay a lawyer—whereas a regular mortgage can be switched without legal fees.

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Sidebar:  The Manulife Bank survey had a few more notable findings:

• 64% of respondents did not make any mortgage pre-payments in the past year
• 43% said they’d have difficulty making their regular mortgage payment within three months, if the primary income earner lost their job. Of these, 17 per cent would have difficulty after one month.
• 40% could keep up their mortgage payments for 3-12 months if the primary income earner lost their job.

Bank Status Is No Panacea

Life as a small bank is hard.  There are endless regulations, compliance costs, capital constraints, loss provisions, technology investments, auditing expenses, overhead costs, etc.

Yet, there are mortgage lenders out there gung-ho about getting bank status.

Being a bank has benefits to a lender, no doubt. One is lower warehousing costs (the cost of holding mortgages until they can be sold off to investors). Another benefit is brand credibility. Another is increased-cross-selling opportunities and product offerings. And there are others.

Probably the most widely-cited benefit, however, is the ability to accept deposits.  Deposits are seen as a cheaper source of mortgage funds than securitization and most alternative funding channels. In theory, that allows for a bigger spread (profit) on mortgage lending.  Most mortgage lenders would agree that, without deposits, a bank license isn’t worth the hassle.

The challenge, however, is that everyone wants deposits. In fact, the deposit wars are as fierce as the mortgage wars.  It’s even making some big banks do the unthinkable:  offer competitive savings rates!

The result is twofold:

• Net interest margins will fall
• You’ll now find lenders with established brand names that can’t generate decent deposit growth.

How then, is a new mortgage bank with minimal recognition going to steal deposits from brand giants like ING, and from the Ally's of the world, with their monster marketing budgets and 3.30% 5-year GICs? 

It’s most likely not going to happen. Most wanna-be-bankers might do better to redeploy their resources and simply partner with existing banks.

Prime – 1.00% Variables

“We definitely believe it’s going to get back to prime minus 1...It’s a rate war out there.”

That’s a broker talking about variable rates, as quoted by the Globe & Mail a few weeks back.

If we truly knew variable-rate mortgages were headed back to prime – 1.00%, we could strategize appropriately. For example, 1-year terms would be even more compelling—on the assumption borrowers could renew into even cheaper variable rates 12 months hence.

John Bordignon, EVP Strategic Development at Paradigm Quest, says, “Consumers have been asking for adjustable rate mortgages (ARMs) more and more, which in my view is one of the reasons we’ve seen such competitive pricing.”

“In the broker channel at least 65% of the volume has been ARM versus fixed,” says Bordignon. “Historically it’s the other way around—65% fixed, and the balance ARM.”

George Hugh, Vice President, Lending Sales at ING Direct, tells us: “We can’t expect much more discounting.” Hugh senses that profit spreads on variable mortgages are near their minimum.

“We’re in very abnormal market conditions. Mortgage pricing is being driven by excess demand for mortgage business from balance sheet lenders (big banks).  For the most part, these needs are being driven by securitization and other debt issuance programs.  In addition, the Big 5 banks still have a ton of deposits where they pay ‘zero’ interest…and they have to put that money to work. This excess demand is causing mortgage spreads to deteriorate. But now we’re pretty well at a floor.”

“There seems to be a perception that prime – 1(%) is coming back,” Hugh says. “I don’t feel we’re going back to the prime - one days. There’s too much risk in the market and not enough spread for that risk.”

At prime – 0.65%, today’s gross variable-rate spread is roughly 108 basis points (2.35% minus the 30-day banker’s acceptance rate). That’s materially under the 120+ basis points that lenders have typically required in the past. From that gross spread, lenders need to pay securitization costs and/or liquidity premiums (in the case of banks using transfer pricing), hedging costs, underwriting costs, overhead, marketing costs, sales force compensation, etc.

At prime – 1%, Hugh and Bordignon feel spreads would be unsustainable.

That said, there’s always the chance lenders may someday offer short-term prime – 1.00% promotions or “teaser rates”, but Bordignon feels, “We will not see prime - 1.00 as everyday pricing.”

Over the next few quarters, people may shift more into fixed-rate mortgages says Bordignon. “As prime increases, and it will, I think we will revert back to historical splits. That will ease demand for ARMs. In addition, banks won't want to give up a lot of spread in the first quarter of their year, which begins November 1st.”

Instant 120-day Rate Holds

If one of the following describes you:

• You’re semi-seriously thinking of buying a home in the next four months
• You’re considering locking in your variable rate to a 5-year fixed if rates rise, but your lender won’t hold a good rate for you
• You’re casually thinking of refinancing but prefer to wait for fixed rates to rise so that your IRD penalty falls
• You want to hold a rate on a different term than you were pre-approved for elsewhere

…then an ING Direct rate hold might be your cup of tea.

A rate hold does just what it says: It holds you a rate for 90-120-days.

Having a rate hold is like having a free option.  For instance: assume you run out and get yourself a 3.74% rate hold. Then suppose global risks subside and the economy recovers strongly. That 3.74% rate could jump to 4.50% or more over 3-4 months. If that happens and you have a rate hold for 3.74%, you’ve saved yourself over 3/4 point.

Of all the rate-hold options out there, ING has one of the better, for four reasons:

1. ING rate holds are free and entail zero obligation
2. It’s really easy to get one (It takes ~60 seconds. Either you fill out the form or your mortgage planner can do it.)
3. ING has among the best mortgage features in the business
4. ING lets you lock in a rate for 120 days with no credit check and no application.

Things to remember:

• A rate hold means nothing if you don’t meet the lender’s qualifications. Always consult with a mortgage professional first to confirm that you do.
• A mortgage planner will sometimes offer you a better rate than what you can get through ING directly (The 3.74% example above is 5 bps below ING Direct’s normal rate. ING-approved brokers will sometimes do that or better). Moreover, a mortgage planner provides professional advice, full service, and hand-holding throughout the process—at no cost.
• ING lets you extend your rate hold any time. That means you can get a brand new 120-day hold at ING’s then-current rates, anytime you want.

ING isn't the only game in town, of course. Your mortgage planner can identify which lender has the best rate hold for your particular circumstances.

If you know for sure that you’ll be closing on a new home within 120 days, you’ll likely find cheaper pre-approvals elsewhere—albeit with more steps and restrictions.

Thanks Europe & Asia

The market for Canada Mortgage Bonds (CMBs) has jumped to over $189 billion today from less than $10 billion in 2001, and foreigners love ‘em.

Foreign investors love CMBs so much, they bought 37% of last week’s issuance. (25-30% is normal.)

“All kinds of new names are becoming interested in Canada and specifically in housing bonds,” BMO economist Doug Porter told Bloomberg.

This international zeal for our debt has benefits. Most notably, it shrinks the risk premium (spreads) that investors demand from CMBs—when compared with AAA government bonds of the same maturity. 

This, in turn, saves Canadians some basis points off their mortgage rates.  It’s tough to quantify how much higher spreads would be without foreign buying, but let’s call it 10 basis points for conversation.  Ten basis points on a $200,000 mortgage buys about 80 coffees a year—not enough to retire on, but enough to say: “Thanks Europe & Asia.”

10-Year Fixed “Insurance”

Wouldn’t it be nice, other things being equal, to know your mortgage payments until 2020?

The cost of that certainty is steep, unfortunately, as per this story by the Post’s Garry Marr (featuring one of our clients, incidentally).

One of the takeaways is that 10-year terms cost considerably more up-front than 5-year terms. The article equates this difference to an extra “insurance premium,” and that it is.

"The question is, is the insurance policy worthwhile?” says TD’s chief economist, Craig Alexander.

Today’s 10-year fixeds are guaranteed to cost roughly $6,900 more than a 5-year fixed over the first five years.* That’s $6,900 for every $100,000 in mortgage. So if your mortgage is $300,000, you’re paying a whopping $20,700 over 60 months for the “peace of mind” of a 10-year fixed.

“For many people it just might be (worthwhile)," Alexander says. 

We ourselves don’t come across many people where a 10-year makes sense.  Mind you, the story suggests 10-year terms “never work,” but that is hyperbole more than anything. In reality, based on our last historical simulation, 10-year terms beat two consecutive 5-year terms roughly one out of 10 times. (See: Fixed Mortgages: 10-Year or 5-Year)

If you ask most people, the odds of the decade mortgage prevailing this time around are miniscule, assuming you buy into the low-growth/low-inflation economic theory.  Indeed, 5-year rates would have to explode 3.55 percentage points higher in 60 months for a 10-year term to beat two five-years.  That implies a roughly 3.55% leap in bond yields.  For that, Canada would likely need sustained China-style economic growth and inflation, and that’s about as likely as the Detroit Lions winning the Superbowl (we say that being hopeless Lions fans).

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* Assumes a well-qualified applicant, 25-year amortization, equivalent monthly payments, a 4.95% 10-year fixed rate and a 3.59% 5-year fixed rate.

Merix’s New Rental Program

Merix Financial now offers Genworth-insured financing for non-owner-occupied rental properties.

The details:

• Maximum loan-to-value:  80%
• Credit score:  640 minimum
• Maximum TDS:  40% (excluding heat)
• Rental Income:  80% rental offset on all rents
• Pre-approvals:  Yes!

It’s rare to see 80% rental offset for all rental income from all properties. The majority of lenders allow only a 50-80% add-back on rental income, especially rent from a non-subject property that is not owner occupied. (That’s relevant because an 80% offset allows for more flexibility than an 80% add-back. In other words, it’s harder to qualify with an add-back).

On exceptional files, Merix will even consider non-conforming rental income (from a basement suite for example) in major urban centers like Vancouver and Toronto.

The only thing we’d wish for is that Merix didn’t have a rate premium on rental deals. But, surcharge or not, Merix is competitive.
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Sidebar:  MCAP, Canadiana and Macquarie have their own versions of Genworth’s non-owner occupied rental program with 80% rental offset.  Unlike Merix, however, not all of them allow 80% offset on all rent that the borrower receives.

If you don’t mind paying a rate premium, Equitable Trust will finance rental purchases to 85% LTV with a 100% rental add-back.

Incidentally, CMHC (the nation’s biggest default insurer) does not insure rental financing with an offset calculation. That gives Genworth an edge in this department.

Genworth Update

It seems Genworth Financial Canada (the country’s biggest private mortgage default insurer) has been making good inroads with lenders lately.

For example:

• Genworth just cemented a new partnership with Merix Financial, a popular non-bank lender. Among other things, Genworth is offering its Business For Self and non-owner-occupied rental products through Merix. (More on this rental product tomorrow…)
• FirstLine is now using Genworth for things like stated income deals. FirstLine, a division of CIBC, had previously cut back on their Genworth usage when the credit crisis made privately-insured mortgages less attractive.
• A high-level source at the company tells us that Genworth’s volumes are up notably in the last 12 months with major banks (like TD, BMO, and Scotiabank) and credit unions.

A source inside the company also says that Genworth’s delinquencies have been dropping noticeably thanks to a heightened focus on underwriting quality.

2009/2010 CAAMP Financials

Most of us in the broker biz pay our $225/year dues to be members of the Canadian Association of Accredited Mortgage Professionals (CAAMP).

CAAMP is a trade organization that’s dedicated to the advancement of Canada’s mortgage industry.  It has advocated for its members on a variety of issues ranging from brokers’ GST exemption to last April’s new mortgage rules.

Just for thrills we poked through CAAMP’s latest 2009/2010 financials to see how it's been spending and making money. Here are some of the highlights (all comparisons are versus the prior year):

• Membership fee revenue grew 6.2%
• Salaries and benefits rose 8%
• 22% more was spent on advertising and promotion
• Last year’s national conference in Toronto brought in 15.5% less revenue than Vancouver 2008, while remaining CAAMP’s biggest expense at $1.6 million
• CAAMP’s earnings (revenues beyond expenses) dropped about 28%
• Its assets rose 9.7% to $4.3 million

One Insider’s Industry Outlook

We had a somewhat sobering chat with a high-level brokerage executive last week.  He shared some candid opinions on the industry and we’ve conveyed them below (take them for what you will):

• Market share for brokers could drop to 20-25% from roughly 30% today, for reasons that follow.
• The number of brokers handing in their licenses lately has been well above normal.
• Brokerage consolidation is looming because industry volume growth is stalling, broker compensation will shrink due to rate buydowns, and economies of scale will become essential.
• Banks have extraordinary liquidity and will get increasingly competitive on rates. Big banks are not forced to rely heavily on the Canada Mortgage Bond market or high-cost deposits for capital, like many smaller lenders.
• Banks are carrying huge balance sheets into a decelerating market.  More supply of cash and less demand for mortgages means tightening margins. 
• Gaining market share has become a bank obsession.
• Bank sales forces will continue to grow.

What does this mean? 

It means:

• Competition will intensify in ways we haven’t yet envisioned
• It’s a great time to be a mortgage shopper
• It’s not a great time to be a brokerage firm owner
• It’s not a great time to be a smaller lender without diversified funding sources
• If you’re a broker, then selling something besides rate will become essential to survival, as will ensuring your customers make you their last stop, and not their branch.

Statistically, clients who contact a bank or broker are talking to at least one other banker or broker.  As technology makes it easier to shop around, people will increasingly do so. In turn, it may become common for customers to consult three or more sources before settling on one originator.

Fortunately, brokers continue to be differentiated by the choice and independent advice they provide to consumers.  The broker industry will need to heavily leverage those characteristics going forward.

Rate Outlook Clear As Mud

"The fact is we're three years in to the global financial crisis and its dynamics still dominate the economic outlook." – BoC chief, Mark Carney 

The question everyone wants to know is: How long will that be true?  The answer, which is as ambiguous as ever, has a direct bearing on the mortgage rates. 

As always, we can count on the “professional predictors” to have an opinion. Here’s a sampling of what they’re saying now, following a week that brought the third consecutive BoC rate increase and an anemic employment report.
 

The economy will have to worsen further "to prompt the central bank to stop raising rates." - BMO Capital Markets, deputy chief economist, Douglas Porter (Ottawa Citizen)

“…The (Bank of Canada’s) language suggests the bank may pause longer than merely the next meeting or two." - BNY Mellon strategist, Michael Woolfolk (Global)

"In our opinion, the odds favour the Bank of Canada pausing for some time…TD Economics does not anticipate another tightening before March of next year." - TD Chief economist, Craig Alexander (CBC)

“…The bank (of Canada) doesn't know what it is going to do.” – CIBC World Markets Chief Economist, Avery Shenfeld (Vancouver Sun)

“…Rates are low and likely to rise at only a gradual pace in the next 18 months…” - TD Chief economist, Craig Alexander (Globe & Mail)

Do you get the sense that no one really knows where rates will be 12 months from now? If so, you’re right.

But that matters less than one might think.  TD’s Craig Alexander told the Globe’s Rob Carrick this week: “Rates are remarkably low by historical standards. People get so hung up on the direction of interest rates. The level matters.”

Translation:  Today’s 3.59%-3.79% five-year fixed rates are manna from heaven.  So are 2.90% three-year fixed rates and 2.30% variable rates.

Rates are so good in general that most people don’t need to drive themselves to insanity while choosing between fixed or variable rates. As long as you don’t borrow over your head, your finances won’t be decimated by making the wrong choice.

RBC: Housing Affordability Won’t Spark Crash

Low rates have underpinned Canadian home prices for several quarters.  It makes you wonder what will happen when mortgage rates normalize.

RBC economist, Robert Hogue, wondered the same thing, so he performed a study that simulated a return to “normal” rates. (He defines normal as roughly 150 basis points higher than today, based on long-term inflation-adjusted averages.)

The effect of Hogue’s simulation was that home ownership costs jumped from 41% of pre-tax median family income (today) to 46%. The long-term average is 39% and in 1990 it hit 54%.

If we assume median income to be $67,000, for example, it suggests that normalizing interest rates would drive up home ownership costs by roughly $279 a month for the typical household.

This resulting drop in affordability would “continue to cool demand for housing in Canada,” but not pull the rug from underneath it, says Hogue.

The exceptions may be places like Vancouver and Montreal, in which demand could drop “substantially,” he writes.

Here is RBC’s full report. Hogue calls housing affordability “the best measure of underlying stress” in the real estate market. See page 9 of this for RBC’s affordability calculation methodology.

Mortgage Career of the Week

Company:  Homeguard Funding Ltd. (Verico)
Position:  Full time Mortgage Agents / Mortgage Brokers
Location:  Ontario

Click on the position title above for more information. 

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Advertise your mortgage job opening today! Click here to post. Or browse CMT's Mortgage Jobs Database.

Prime Rate Now 3%

The Big 6 banks have lifted their prime rate to 3.00%, from 2.75%, effective tomorrow.

The move follows the 1/4 point hike by the Bank of Canada earlier today.

The typical deep-discounted variable rate is now 2.30% for well-qualified borrowers.

Apart from variable rates, other short-term rates may come under pressure in the near future.  12-month bankers’ acceptance yields, which often track things like 1-year fixed mortgage rates, have broken above levels not seen since January 2009.

If you’re in the market for a variable and can get a 1-year fixed for the same price, it may pay to lean towards the latter. (See: 1-year Fixed Mortgage)

BoC Hikes Another 1/4 Point

It could have gone either way but Mark Carney and co. felt Canada’s economy was hot enough to warrant another tightening.

The Bank of Canada has therefore raised its overnight rate target to 1%, from just 0.25% three months ago.

Here’s the gist of the Bank’s written statement today:

• “…Consumption growth is expected to remain solid and business investment to rise strongly.”
• “The Bank now expects the economic recovery in Canada to be slightly more gradual than it had projected…”
• “…Financial conditions in Canada have tightened modestly but remain exceptionally stimulative.”
• “Any further reduction in monetary policy stimulus would need to be carefully considered in light of the unusual uncertainty surrounding the outlook.”

As a result of today’s increase, prime rate will likely climb to 3.00% this week. It would be the first time prime has seen 3% since February 2009.

If you’ve got a variable payment mortgage, this hike will add about $13 to your monthly payment, for every $100,000 you owe.*

The next BoC interest rate meeting is October 19.

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* Assumes a 25-year amortization, semi-annual compounding, and a prime rate increase of 25 basis points.

RBC Improves Its RateCapper

Big banks have been busy trying to create mortgage niches. BMO has its “low frills” 5-year fixed, CIBC has its switch program, and now RBC is positioning its RateCapper as a marquis product.

RBC’s RateCapper mortgage is both new and old, having re-launched in April after a multi-year hiatus.  It’s basically a variable-rate mortgage with a maximum rate (cap), which protect borrowers in case prime rate skyrockets.

Eliminating risk on a variable-rate mortgage sounds marvellous. The problem is, the RateCapper launched with a cap rate (5.85%) that was too high. Most who did the math found that it wasn’t worth considering.

RBC is now trying to address that problem by significantly lowering the cap.  As of today, the maximum rate of the RateCapper is 4.125%. (The starting rate is prime. See this.)

As a result, the RateCapper is now a better match for today’s prime – 0.70% variables. In fact, depending on your assumptions, you could make a case that the RateCapper will save you more than a standard variable if prime rate exceeds 5% in the next few years.

That’s a big “if,” of course, but there are people who don’t believe rates will stay below 5%.  For those people, the RateCapper may be worth a look.

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RateCapper Trivia:  In July 2003, the media reported on “inconsistencies dating from 1997” on a group of clients holding RBC’s RateCapper mortgage. The Hamilton Spectator, for instance, said: “(RBC) contracted that (RateCapper) clients would pay a guaranteed maximum rate, but the rate was ‘missed’ on some mortgages.” As a result, some people apparently paid more than they should have. It does pay to periodically double-check your bank’s math.