Mortgage Rates & Mortgage Broker News in Canada

1-Year Terms Looking Better With Latest Fed Forecast

On Wednesday, the Federal Reserve dished out good news to mortgagors holding short-terms or variable rates.

The U.S. central bank threw a curveball at financial markets by projecting “extraordinarily low levels” for American interest rates through “at least” 2014. That’s a full year and a half later than its prior forecast.

With an 83% correlation* between Canadian and U.S. policy rates, this news will certainly impact Canada’s mortgage market.

Yields Perk Up

Fear gave way to hope in financial markets this week. That led traders to look past recent European downgrades and push Canada’s 5-year yield to a 6-week high.

The 5-year government bond (which typically leads fixed mortgage rates) ended the week at almost 1.40%, up 13 basis points.

(Click to enlarge)

Yields have had every opportunity to make new lows this year. Yet, despite distress in Europe and mixed economic messages domestically, they’ve held strong.

Lenders will watch bonds in earnest next week to see if the trend continues. A meaningful break above 1.50% on the 5-year yield could halt or reverse the rate reductions we’ve seen in the last 10 days.

Mortgage Term Review - January 2012

It's been quite a stretch since CMT's last term analysis. Given the slew of precedent-setting rate changes lately, it's high time we run another one.

For those in solitary confinement last week, the big news was BMO's 2.99% 5-year Low-Rate Mortgage. It made every major newspaper and newscast in the country. Even the CEO of competitor ING Direct, Peter Aceto, found it compelling. He told the Toronto Star:

“If you’re satisfied with everything else, take it, because 2.99 for 5-year money is a great rate…I had some of the people here look into it, and it’s definitely the lowest they’ve been able to find for as far back as it’s been tracked.”

(Aceto went on to suggest that 2.99% was “unsustainable” from a profitability standpoint.)

In any event, say what you will about the limitations of BMO's product (and there are many), but it sure did push down rates industry-wide. Here's a look at how the recent rate changes impact mortgage terms:

No BoC Rate Change for 16th Straight Month

Canada’s key interest rate will begin 2012 exactly where it’s been since September 2010 – unchanged at 1.00%.

It's the longest stretch on record without a Bank of Canada rate change.

Economists didn’t expect the BOC to move rates at this meeting. Instead, they were looking for any change of language in the Bank’s official statement. As usual, there were a handful of conspicuous statements in that release. The BoC said:

Mortgage Rates After the EU Downgrade

Nine European countries saw their S&P credit ratings chopped yesterday. Among them, France and Austria lost their coveted “AAA” and Italy and Spain’s ratings sank two notches to BBB+ and A respectively.

While somewhat expected, this move undermines EU confidence and raises borrowing costs for some countries that barely make ends meet now.

By comparison, Canada’s AAA bonds (which impact our mortgage rates) look more appealing to investors. Barring offsetting news, downgrades in Europe should push our yields lower next week, some traders think.

BMO’s 2.99% 5-Year Fixed Sets Bank Record

Later today, BMO is reportedly announcing the lowest advertised 5-year fixed rate ever for a Canadian bank.

It’s a 2-week promotion at 2.99%. Official announcement to follow.

This previously unthinkable rate has been eclipsed only by a handful of other mortgage companies. Those lenders (AGF Trust and Lendwise) made sub-3% rates available to brokers for brief spurts in 2011.

The Joy of Spring (Market)

When winter gets gloomy, it’s comforting to know that spring is just a few short months away.

Spring is revitalizing. There are more hours of energy-giving sunshine, happy little flowers start springing to life, and lenders fight like alley cats for spring mortgage business. (Yes, great mortgage deals can be invigorating!)

Indeed, “spring market” is prime time in the home loans business. Some mortgage planners do over half their annual volume in the four months from March to June.

Real estate activity reflects a somewhat similar upswing.

Top 5 Mortgage Trends of 2011

Cheap money fuelled another buoyant year for real estate in 2011.

That helped housing values climb a wall of worry (prices rose another 4.6% Y/Y as of November) despite numerous predictions of a correction. Mortgage balances went along for the ride, growing another 7%.

2011 was a year marked by new mortgage regulations and a rate market that continually surprised most observers. Among all of the various developments, however, there were five mortgage stories that stood above the rest:

Short-Term Rates Stay Put

Canada’s key interest rate will end 2011 unchanged.

The Bank of Canada left its policy rate at 1.00% today, as anticipated.

In a statement, the Bank said European economic performance will be worse than expected, Canadian and U.S. growth are “slightly” better than expected, and inflation will “ease.”

Variable Discounts Turn to Premiums

In the last few days, RBC and Scotiabank have eliminated their advertised variable-rate discounts.

They’re now promoting variable mortgages at prime + 0.10%, twenty basis points more than their previous “special offers.”

Prime + 0.10% (i.e., 3.10%) is an interesting number. A few months ago consumers thought that fat variable-rate discounts were here to stay. Variables above prime will now come as a shock to some people.

The banks are well aware of that. They know that pricing above prime impacts consumer psychology.

Growing Rate Cut Speculation

Since August, financial markets have been pricing in at least one Bank of Canada rate cut (according to overnight index swap yields, which reflect rate expectations).

Economists, on the other hand, have hung on to their rate hike forecasts for dear life. Most analysts still predict that the next BoC move will be a rate increase in late 2012.

Now, we’re starting to see some economists let go of those predictions.

Job Losses & Mortgage Rates

Seldom does Canada lose more than 50,000 jobs in one month. That’s why October's surprise loss of 54,000 has economists rethinking their rate forecasts all over again.

Debate about the need for a BoC rate cut may now grow a little louder, especially if we get another economic bombshell of this sort.

There was no shortage of reaction to Friday’s grim employment data. Here’s a sampling:

Rates-a-Changin

RBC has matched most of TD’s recent rate increases. Other banks may be close behind.

Here’s what’s happening at RBC, the nation’s top bank:

• 5-year posted:  Up 10 bps to 5.29%
• 5-year “special”: Up 10 bps to 4.09%
• 3-year posted:  Down 30 bps to 4.05%
• 5-year variable: Up 15 bps to prime – 0.10%
• Open variable:  Up 30 bps to prime + 1.00%

These changes happened to coincide with today's Canadian and U.S. jobs reports, which far exceeded forecasts. North America’s surprise employment growth is boosting bond yields (which reduces lenders’ profit on longer-term fixed mortgages, other things being equal).

TD Ups 5-year Rate, Cuts 2- & 3-Year Rates

TD Canada Trust is raising its posted 5-year fixed rate by 10 basis points to 5.29%.

Meanwhile, its 2- and 3-year rates are dropping 3/10ths of a percentage point. (See: TD’s Release)

TD last changed its 5-year rate two weeks ago when it dropped to 5.19%. Since then, the 5-year bond yield — which guides fixed rates most of the time—has been flat. As a result, today’s increase may surprise some.

How Low Can Yields Go?

The 5-year government yield is doing the limbo, and the bar keeps being lowered.

It closed Friday at 1.35%. How low it goes depends on how bad things get economically—and how bad investors think things will get.

It’s interesting to contrast Canada to other countries because our yields are still notably higher than many. That’s despite a relatively stable fiscal and economic outlook.

Here’s a sampling of 5-year yields from around the globe, including each country’s debt-to-GDP and unemployment rates (UR):

Variable Discounts Quickly Evaporating

If you need a new variable-rate mortgage, call or email a mortgage advisor pronto.

Multiple banks (CIBC, RBC, TD, Scotia) are slashing variable discounts again, effective tomorrow.

Second-tier lenders probably won’t be too far behind.

Banks seem dead-set on herding borrowers out of low-margin variable rates. Spreads are simply not profitable enough—at least compared to succulent and juicy fixed-rate margins.

Scotia Leads Posted Rates Lower & Launches 2-Year Special

After a month of plunging bond yields, a major bank has finally decided to lower its posted 5-year fixed rate.

Scotiabank has just announced a 20 basis point cut to its 5-year fixed mortgage. Several of its other fixed rates are falling as well (between 6-20 bps), effective tomorrow.

A New Record Low for the GoC

The 5-year Government of Canada bond yield fell today to a never-before-seen 1.28%.

Its 13 bps drop came on the heels of August job losses, a stock market selloff and more eurozone anxiety.

The spread between posted fixed rates and the 5-year yield (a very rough proxy for a lender’s base funding costs) is acting like there’s a credit crisis. But there’s not…at least not yet.

(Click to enlarge)

Rate Hike Expectations Get Pushed Out

“Economists don’t get burned…if they’re wrong.”

—TD Macro Strategist, David Tulk

****

Good thing, because they were "a little off" once again.

The latest Bloomberg economist survey shows the economic establishment now forecasting a 75 bps bump in the overnight rate by the end of 2012. That’s half the increase that economists predicted last month.

What’s Behind Banks’ Variable Rate Changes

Why did RBC and TD cut their variable rate discounts and spark an industry trend? Here’s the reason straight from the source (Dave McKay, Group Head, RBC Canadian Banking):

“A combination of factors in the price increase on Wednesday; one, there was a dislocation between the price of the fixed rate book versus the variable rate book which was encouraging, I guess, consumers to really move into a much, much lower variable rate book, which had very, very thin margins.