Mortgage Rates & Mortgage Broker News in Canada

TD Raises Prime Rate To 2.75%

TD is the first big bank out of the gate. It just raised its prime lending rate by 1/4 point to 2.75%.

The change takes effect tomorrow.

TD was the first of the Big 5 to raise prime after the June 1 BoC meeting as well.

Other banks will likely follow later today or tomorrow.

Canada’s Key Lending Rate Headed Higher

The Bank of Canada has lifted its key lending rate by 1/4 percentage point, to 0.75%.

The Bank had this to say in its written statement:

• “The global economic recovery is proceeding but is not yet self-sustaining.”
• “Housing activity is declining markedly from high levels, consistent with the Bank’s view…”
• “The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.”
• “Both total CPI and core inflation are expected to remain near 2 per cent throughout [2011].”

The above chart (Click to enlarge) shows just how low Canada’s overnight rate is when compared to the last 10 years. Accordingly, the BoC says today’s new 0.75% rate “leaves considerable monetary stimulus in place.”

The mortgage industry now awaits confirmation from the Big 5 banks that prime rate will follow 25 basis points higher. The banks typically announce prime rate increases the same day as BoC rate hikes. The last time around (on June 1), TD Bank was the first to act, raising its prime rate at 1:32pm ET.

Bond yields, which affect fixed mortgage rates, were down across the curve following today’s BoC statement.

As of this writing, the 5-year yield has sunk to 2.31%, just a few basis points above its one-year low of 2.29%. Given that many were awaiting today’s announcement for an indicator of rate direction, we may now see 5-year fixed rates drift slightly lower in the near term.

The next Bank of Canada interest rate meeting is September 8.

On The Eve Of The BoC Meeting…

Every major economist in the country expects the Bank of Canada to hike its key lending rate by 1/4% tomorrow (19 out of 19 economists to be exact, according to a Bloomberg survey).

What economists are most interested in, however, is how the BoC’s statement will read.  If it’s overly cautious we might see a drop in yields (which is good for mortgage rates).  If the statement has a more positive economic tone, then yields could rise. Here’s more on that from:

• The National Post: What to expect from Bank of Canada
• The Star:  Carney’s Balancing Act

The BoC has four rate decisions left this year, including tomorrow’s.  We’ll report on the Bank’s announcement just after 9:00am ET.

Market Projects Prime Rising To 2.75%

Canada’s key lending rate is headed at least 1/4 point higher in eight days…that is, if the financial markets are right.

Here’s the latest…

• Friday’s eye-popping employment report has lifted the odds of a quarter-point hike to 96%, based on the price of overnight index swaps.
• Bankers' acceptance (BA) yields have averaged 20 bps above the overnight rate since 1992. Their current 0.94% level also points to a 25 bps rate increase.
• Every last one of Canada's primary securities dealers is now predicting a 25 basis point hike this month, according to a Reuters poll on Friday. Not only that, but every single dealer also forecasts another rate increase in September.

If the overnight rate does rise to 0.75% on July 20, prime rate will likely move to 2.75%. The last time prime was above 2.50% was February 2009.

Sources: Bloomberg, Reuters

Long-Term Mortgage Rate Forecast: Down Big

Economic worries have led major economists to slash their long-term interest rate predictions.

The big banks’ average forecasts for Canada’s overnight rate and 5-year bond have plunged 60 and 57 basis points respectively. That’s compared to our last rate forecast review just two months ago.

What follows are the latest long-term interest rate projections from each of Canada’s Big 5 banks (these are year-end numbers)…

Overnight Rate Forecast

Bank	2010	2011
BMO	1.05	2.60
CIBC	1.25	2.25
RBC	1.25	2.75
Scotia	1.00	2.25
TD	1.50	3.00
Avg	1.21	2.57
Chg vs Today	0.71	2.07

5-Year Government Bond Yield Forecast

Bank	2010	2011
BMO	2.63	3.6
RBC	2.85	3.5
Scotia	2.70	3.50
TD	3.20	3.75
Avg	2.85	3.59
Chg vs Today	0.32	1.06

(CIBC did not publish a 5-year bond forecast.)

Variable-Rate Mortgage Forecast

Big bank economists, on average, expect a 207 basis point increase in the overnight rate over the next 18 months.  Their outlooks, if accurate, imply a 4.50% prime rate by December 31, 2011. Prime rate is currently 2.50%, and expected to increase 1/4 point on July 20.

Based on a 65 basis point average discount from prime, this suggests 5-year variable rates in the 3.85% range by year-end 2011. They’re around 1.90% today, give or take 0.10%.

Fixed-Rate Mortgage Forecast

Banks foresee 5-year bond yields climbing 106 basis points in the same 18-month timeframe.  That would put the 5-year yield at 3.59% by the end of next year.

Assuming a typical 120 basis point spread above yields, this suggests deep-discounted 5-year fixed rates could rise to roughly 4.79% by year-end 2011.

Econo-Talk

Here’s a sampling of what the banks’ “professional predictors” (economists) are saying now:

• BMO:
  • “We look for the Bank of Canada to raise its policy rate 25 bps to 0.75% on July 20.”
  • Expect “the earliest (U.S.) Federal Reserve rate hike in 2011Q3.”
  • “We look for the Bank of Canada to pause for at least a couple of announcement dates through the autumn.”
• CIBC:
  • The BoC will take the “overnight target higher by two or three more quarter point steps. Thereafter, the Bank is likely to stay on hold until US conditions…are healthy enough for the Fed to be close to hiking.”
• RBC:
  • “Canada’s domestic economy is in good shape with the Bank watching events abroad. To date, the effect on Canada has been limited thereby paving the way for another rate increase later this month.”
  • “The (U.S.) Fed will hold the Funds target in its current range until the second quarter of 2011 rather than hiking at the end of this year.”
  • “Canada’s recovery will continue at a decent clip in late 2010 and early 2011.”
• Scotia:
  • “This pace (of Canada’s recovery) is almost twice as fast as that seen after the 1982 recession, and well ahead of the sluggish recovery in the early to mid-1990s.”
• TD:
  • Canada’s labour market has posted “an astounding performance given that it typically has taken 6-11 quarters to recover losses in past Canadian recessions.”

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Things To Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online. History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the better sources of educated opinion on interest rates.

“Chg” = The expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

For banks providing mean quarterly forecasts, we have averaged their Q4 and Q1 forecasts to estimate year-end figures for 2010 and 2011.

Data Source:  BMO, CIBC, RBC, Scotia, TD

Rates Will Still Rise, But Slower—Say Analysts

Major economists expect Canada’s overnight rate to rise to 1.25% by year end—according to a Bloomberg survey. That’s down from a May projection of 1.50%.

(The overnight rate is currently 0.50%. This rate impacts prime rate, which in turn impacts variable mortgage rates.)

Here’s a summary of what the Big 5 banks are saying about interest rates now. The consensus still seems to suggest a 1/4 point rate increase at the next July 20 Bank of Canada meeting.

*******************

• BMO: 
  • “Assuming financial markets don’t seize up, we expect a 25 bps rate hike in July, though recent economic softness and uncertainty point to a pause in September.” [Source]
  • “That buzz you hear about a possible double-dip recession is legitimate and will remain a worry for markets the rest of the summer and into the fall.” [Source]
  • BMO’s forecast suggests a 50 basis point hike in prime rate by year end. [Source]
• CIBC: 
  • The flight to safety bid in bonds will fade if there are no significant outright sovereign defaults. (If right, this portends higher bond yields to come. - CMT) [Source]
  • CIBC feels the BoC will move the overnight target “higher by two or three more quarter point steps.  Thereafter, the Bank is likely to stay on hold until US conditions…are healthy enough for the Fed to be close to hiking.” [Source]
• RBC: 
  • “We look for the Bank to increase interest rates gradually as it becomes increasingly apparent that ultra-low interest rates are no longer required to support growth.” [Source]
• Scotia:  
  • Scotia suggests a 75 basis point hike in prime rate by year end. [Source]
  • “The Canadian economy is so highly integrated into global trade and capital markets that it is unlikely that we can significantly outperform other countries.” [Source]
  • Problems in Europe and the U.S. “probably won’t trigger the dreaded ‘double dip’ (recession).” [Source]
• TD:
  • “Despite the significant slowdown in economic activity in April, we expect the recovery in Canada to remain on track.” [Source]

RBC Quietly Cuts Rates Another 10 Bps

RBC has dropped most of its fixed rates another 10 basis points—just one week after its last rate cut.

It did so without issuing a press release. (For whatever reason, sometimes RBC likes the publicity and sometimes it doesn’t.)

RBC’s posted 5-year fixed rate is now 5.79%, versus 5.89% last week.

It’s 5-year fixed “special offer” rate has dropped to 4.39%.

The other banks will probably match RBC’s reductions next week. The Big 5 has taken a lot of heat lately for keeping rates high while funding costs have plunged.

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Update July 5:  BMO has matched RBC's rate cut.

Yields Plunge. Spreads Explode

The bond market continues to defy economists’ expectations (no news there). What is news, is that the 5-year yield has fallen to 2.30%, well below technical support at 2.40%.

Disappointing Canadian GDP, weaker growth in China, and rallying U.S treasuries are just the latest catalysts pushing down yields. The 5-year GoC is now back to its yield levels from May 2009.

More importantly, the spread between discounted 5-year fixed rates and the bond is now 2.09%—a 15-month high. (The 10-year average is 1.25)

(Click chart to enlarge)

Fat spreads mean fat profits for lenders. It also means that fixed rates are way higher than they should be, based on the cost of funds.  The last time the 5-year yield was at 2.30%, discounted five-year fixed rates were 3.75%. (The banks’ “special offer” discounted rates are 4.49% today.)

It wouldn’t be a stretch to expect more cuts to fixed rates soon…

RBC Drops Fixed Rates 0.10

RBC has cut its 1 to 10-year fixed rates by 0.10 percentage points—effective tomorrow.

Its new 5-year posted rate is 5.89%, while its “special offer” rate is now 4.49%.

This move should compel the other big banks to follow. It should also reduce the industry’s benchmark qualifying rate to ~5.89% from today’s 5.99%. (The qualifying rate change would not take effect until Monday, July 5.)

RBC announced no changes to its variable rates.

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June 25 Update:  BMO and TD have followed in RBC's footsteps by cutting most of their fixed rates 10 basis points. BMO's "low frills," 5-year fixed mortgage is now at 4.15%. As usual, full-featured mortgages are available at even lower rates through the broker channel.

Economic Headwinds Drive Down Yields

Canada is flying into considerable global economic headwinds. At least that’s what fixed-income traders (the people making big-money bets on rates) think.

Traders have pushed down Canada’s benchmark 5-year bond yield to 2.46% on a variety of concerns. That is a four-month low.

The thick black line on the chart is a 50-day moving average of yields and we’re well below that average at the moment.

Among other things, Canada’s bond market is reacting to:

• A weaker U.S. economic outlook from the Fed
• Record-low U.S. home sales
• Benign inflation (1.8% versus the BoC’s 2% target)
• European credit default risk
• U.S. unemployment
• Weak Canadian retail sales
• Investors’ appetite for risk-free assets (govt. bonds)

Yet, despite all the above, fixed-income traders were still pricing in a 73% chance of a 25 basis point rate hike on July 20 (as of yesterday). If they’re right, that would lift prime rate (and variable mortgage rates) accordingly.

Fixed mortgage rates will continue to be guided by bond market. Currently, the 5-year yield is riding just above major long-term support in the 2.40% area. Most expect it to bounce off these levels but, as always, one never knows what news tomorrow will bring.

Analyzing Past Bank of Canada Rate Increases

BMO Capital Markets recently made some interesting observations about the Bank of Canada’s  rate hike tendencies.

See:  Bank of Canada Tightening Cycles

Despite a limited sample size, BMO listed the following common traits from prior rate increase cycles:

• Bank of Canada (BoC) rate hikes come in “clusters, moving across a minimum of two consecutive announcement dates. (If this holds true, the BoC will raise rates again on July 20.)
• 84% of the past 25 rate increases have been 25 basis points
• The BoC has often paused its rate hikes during past tightening cycles--sometimes more than once in a given cycle
• The BoC has shown it will tighten even with core CPI inflation below its 2% target (That’s largely because the BoC tries to anticipate inflation and because it takes roughly a year or more for rate hikes to work through the economy.)
• Rates rose an average of 200 basis points over 18 months in the past four cycles 

(Chart via BMO Capital Markets, Author: Michael Gregory, CFA, Senior Economist)

BMO says the Bank of Canada typically sets policy after heavy consideration of five “C’s:”

1. Core CPI (inflation)
2. Canadian dollar
3. Commodities
4. Cross-border exports (to the U.S.)
5. Crises (economic, financial, or geopolitical)

That last “C” happens to be a factor today, courtesy of the European debt crisis. Nonetheless, BMO says: “We judge the Bank’s scale will eventually tip to the domestic data side, and the new tightening cycle will toe the stylized line.”

In other words, BMO expects concerns about European debt to fade at some point, with the BoC continuing its path to more normalized (higher) interest rates.

TD Raises Prime 1/4 Point

Prime rate is on its way to 2.50%. 

TD just announced that they’re increasing their prime rate by 25 basis points, effective tomorrow. 

TD is the first bank to raise prime after the Bank of Canada’s rate hike today. The other big banks will probably be right behind.

 

Some had hoped that the banks would not raise prime today—effectively “giving back” the 25 bps they “kept” on December 9, 2008. (At the time, the Bank of Canada had slashed rates 75 bps. But with spreads compressed by the credit crisis, the banks said they could only afford to cut prime by 50 bps.)

Given today’s spread between discount variable rate mortgages (VRMs) and bankers’ acceptance (BA) rates, it doesn’t look like we’ll get that 25 bps back for a while—if at all.

At the moment, the VRM-BA spread is currently around 119 bps: 

2.00% [typical VRM rate of prime - .50%] - 0.81% [3-month BA rate] = 119 bps

Lenders also have to account for securitization costs in many cases, which reduce spreads even further (a minimum of 13 bps based on the last Canada Mortgage Bond floating-rate issue, plus related costs).

Then, of course, banks have to consider funding costs for all the other products they offer that are based on prime rate.

Long story short:  Lenders like to make 120-130 bps spreads on 5-year mortgage terms. “Eating” today’s 25 bps BoC hike (and not raising prime) would make margins far too close for comfort.
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Update:  As of 3:15pm ET RBC and CIBC have followed TD’s lead in raising their prime rate from 2.25% to 2.50%.

Market Predicts Imminent Rate Hike

25 of 27 economists surveyed by Bloomberg expect the Bank of Canada (BoC) to lift short-term rates by 1/4 point tomorrow.

Overnight index swap (OIS) traders are betting on higher rates as well. They’re pricing in a 75%+ probability of a hike on Tuesday. (Overnight index swaps provide a gauge of what the overnight rate is expected to average over a given period--in this case, over the next month.)

If the BoC does raise its key lending rate, it would be the first increase since July 2007—right before the credit crisis unfolded.

It would also be Mark Carney’s first hike as BoC governor.

Plunging Confidence Drives Down Rates

Nothing spooks financial markets like uncertainty and risk, and it shows in today’s bond yields. 

The 5-year yield (which influences 5-year fixed mortgage rates) is down strikingly in the last 30 days. It dropped another 12 basis points today.

In less than a month, yields have tumbled 62 bps. That’s the biggest one-month drop since December 2008.

A glut of negativity is herding investors into the safety of bonds (and driving down yields), including:

• The European crisis
• North Korean war threats
• The stock market selloff (The S&P 500 has plunged 10% since April 23—dropping below the key 200-day moving average)
• A dip in the U.S. leading indicators (the first decline in a year)

To get a sense for the perceived financial system risk out there, take a look at LIBOR. LIBOR is the rate at which banks lend unsecured funds to each other. It’s risen 29 of the last 30 days.

The good news definitely seems sparse beyond Canada’s borders, but fear is often fleeting. While the current market environment is grim, sentiment may be considerably different next week.

Today’s concerns must also be set against a strong rebound in Canadian economic performance. When the problems above are resolved, the BoC will likely resume focus on Canada’s robust domestic indicators.

Going forward…

• Most analysts still expect a rate hike come June or July. See: June Rate Hike Still Likely…
• However, traders have removed some of their bets for a Bank of Canada move on June 1. Financial futures peg the probability of a June hike at roughly 50/50.
• Fixed rates may drop a bit more. This morning, RBC cut its 5-year rate by 11 bps. TD has followed. Other banks should be right behind.
• The banks' new 5-year fixed "special offer" rate is 4.59%. Expect a minimum of 10-20 basis points off that if you're well qualified.
• Barring further changes, the new mortgage qualifying rate will be 5.99%, effective May 31.

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Sidebar:  The last time 5-year yields were this low was March 5. Posted 5-year fixed rates were 5.39% at the time. Today, they’re 5.99%—60 bps more! Granted, there’s more of a risk and rate-hike premium built into today’s rates, but 60 basis points seems extreme.

Long-Term Mortgage Rate Forecast

Here are the latest long-term interest rate forecasts from Canada’s major banks.

Overnight Rate Forecast

Bank	2010	2011
BMO	1.35	3.35
CIBC	1.25	2.50
RBC	1.50	3.50
Scotia	1.50	3.00
TD	1.50	3.50
Avg	1.42	3.17
Chg	1.17	2.92

5-Year Government Bond Yield Forecast

Bank	2010	2011
BMO	3.60	4.30
RBC	3.45	4.10
Scotia	3.80	3.95
TD	3.50	4.30
Avg	3.59	4.16
Chg	0.62	1.19

Summary

Big bank economists, on average, are forecasting a 2.92% increase in the overnight rate in the next 19 months.  Their forecasts, if accurate, suggest that prime rate will rise to roughly 5.25% from its current 2.25%.

On the fixed-rate side, bond yields are expected to rise 1.19% in the same timeframe, according to bank estimates. (Bond yields drive fixed mortgage rates). Based on a typical 120 basis point spread above yields, this suggests deep-discounted 5-year fixed rates could rise to around 5.36% by year-end 2011.

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Things To Note:  These forecasts are made by the banks and are subject to frequent change. This data is provided only for general interest.  Always discuss your needs and risk tolerance with a mortgage professional before acting on any information you read online. History has shown that it’s near impossible to accurately predict interest rates long-term so use these figures at your own risk. That said, while economist projections are often wrong, they are still one of the best sources of educated opinion on interest rates.

“Chg” = The expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All forecasts are based on the respective year-end.

Source:  BMO, CIBC, RBC, Scotia, TD  (CIBC’s 5-year bond forecast was not available at the time this was posted.)

Record Employment Suggests June Rate Hike, Say Dealers

No one foresaw this degree of job creation.

April’s 109,000 new jobs set a record for a single month, and crushed economists’ median estimate of 25,000.

In percentage terms, it was the biggest monthly employment gain since 2002.

Canada has now regenerated two-thirds of the jobs it shed in the recession. Given this strength, inflation risks are once again top of mind.

After yesterday's jobs report, every major securities dealer is now predicting a 1/4 point rate hike in June, July and September (source: Reuters).  By the end of this year, securities dealers forecast a 1.25 percentage point increase in the overnight rate.

National Bank economist, Yanick Desnoyers, says “a rate hike in June is a done deal,” barring unforeseen events.  In just over three weeks, we’ll find out if he and his peers are right.

TD Drops Its 5-year Fixed Rate

TD Canada Trust has trimmed its posted 5-year fixed rate by 15 basis points, from 6.25% to 6.10%.

That comes with bond yields down 30 basis points from the last time fixed rates increased on April 26. (Bond yields generally lead fixed-mortgage pricing, but not always on a one-to-one basis)

If the other banks follow as expected, and barring further changes, then:

• The new benchmark for a discounted 5-year fixed rate will drop to 4.70%. Expect banks to provide at least 20 basis points “discretion” off this rate if you’re well qualified.
• Competitive broker rates for 5-year fixed terms are under 4.50% and may drop a bit more if bond yields don’t rebound.
• The qualifying rate will change to 6.10% on Monday, May 17. If you choose an insured mortgage with a variable or 1-4 year fixed term, lenders will make sure you can afford the payments at this rate.

None of TD’s other rates were changed.

Yields Fall From Their High

The 5-year government bond yield has dropped over 30 basis points from the 21-month high it set a few weeks ago.

As of this writing, the 5-year yield is at 2.88%. That’s 20 bps below its level on April 26 (the date RBC led the industry higher with a 15 bps hike in fixed rates).

Chart watchers now expect the yield to head down towards support. Support is around the 2.75-2.80% mark, which is a long-term level where there have been multiple turns in yield direction.

Since fixed mortgage rates are linked to bond yields, we could see discounted fixed rates fall somewhat in the very near future.

RBC Raises Fixed Rates Again

RBC just raised all of it’s fixed rates by 15 basis points, effective tomorrow.

Here’s the press release.

RBC’s 5-year posted rate is now 6.25%. If other banks follow, it will increase the qualifying rate for variable and 1-4 year fixed terms accordingly.

RBC’s “special offer” 5-year fixed is now 4.85%.  As usual, most people should be able to find full-featured 5-year fixed terms for at least 1/4 point off that number.

RBC aside, we’ve seen a couple of discount lenders come out with lower 5-year fixed promo rates in the last few days. In addition, bond yields have been taking a one-week respite from their march higher. So it’s interesting that RBC has decided to lift rates today.

Rate Hike On June 1st, Market Predicts

Canada’s lowest-ever variable mortgage rates could soon be a fond memory…quicker than some thought!

11 out of 12 analysts polled by Reuters now predict a June 1st rate hike. (Minds change quickly. Before yesterday’s Bank of Canada (BoC) announcement, it was only 3 out of 12.)

Swap traders--who bet millions on interest rate direction--are pricing in a 93% chance that the BoC lifts rates on June 1st.

Speaking of which, check out the move on this baby. This is the 3-month overnight index swap (OIS) rate. It represents the expected overnight interest rate over a 3-month period. It’s been a long time since it’s ramped up like this.

Here’s what analysts are saying now about the Bank of Canada announcement and future interest rates:

• "Removing the conditional commitment ... (is) as good as cementing a June 1 hike…That leaves open the debate over whether 25 basis points or 50 basis points is likely." -- Derek Holt, VP of Economics, Scotia Capital (Montreal Gazette)
• “We anticipate gradual 25-basis point increases at each of the next five Bank of Canada fixed rate announcements through 2010.” -- TD economist, Diana Petramala. (Globe & Mail)
• “This statement marks a dramatic change in tone by the bank, and doesn't rule out possible 50 basis point moves." -- Douglas Porter, Deputy Chief Economist, BMO Capital Markets. (CTV)
• A “moderate growth track [will] allow the BoC to stick with only 25 basis point moves and to take a pause on rate hikes after October.” – CIBC Chief Economist, Avery Shenfeld. (Vancouver Sun)

The same analysts polled by Reuters above also predict a 100 to 175 basis point jump in the overnight rate by year end.  That suggests a 3.25% to 4.00% prime rate by New Years, give or take 25 bps. (Prime rate is 2.25% today)

More on the Reuter’s Poll…