Canadian Mortgage News & Canada's Mortgage Trends

Variable Rates to Rise?

We're hearing more talk from lenders that variable mortgage rates may be on the rise (soon).  Prime - banker's acceptance spreads have narrowed and are squeezing lender margins.  As a result, variable rate mortgage lenders are considering reducing their discounts from prime rate to compensate.

If you need an approval for a variable-rate mortgage, it might not be a bad idea to submit your application to a mortgage planner today.

Fixed Mortgage Rates Drop

Fixed rates are finally starting to catch up with the drop in bond yields over the last few months.  Canada's big banks lowered their 5-year fixed mortgage rates 0.20% today.  It was the biggest drop in 16 months.

Posted 5-year rates are now 6.99%.  They haven't been this low since last May.   

Meanwhile, a handful of non-bank lenders have been steadily cutting rates for weeks.  Although, most of their lowest rates require borrowers to close in 30-45 days. 

If you're interested, the easiest way to find these fixed-rate deals is to call a mortgage planner.  We know of only one bank that publicizes anything close to lowest non-bank rates. 

Keep in mind that most of the current specials are available for a "limited time," at least according to the rate bulletins lenders have been sending out lately.  That said, we're frankly a little skeptical of the urgency.  We could be wrong but we're guessing most lenders will keep these "special" low rates around for the next few months or more.

In keeping with the drop in rates, 5-year mortgage-bond spreads have decreased as well.  (i.e.  the difference between 5-year posted rates and 5-year bond yields.)  Since hitting a 26-year high in March, spreads have come down over 0.40%.  That's welcome news to fixed-rate mortgage shoppers because the bond market is the basis by which most lenders set their fixed rates.

Interestingly, Bank of Canada Deputy Governor David Longworth said Thursday, "It's very clear that...unusual spreads, and the financial market upheaval that exacerbated these spreads, will continue to have an impact for some time to come."

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

Speaking of the Bank of Canada, anticipation is building for the Bank of Canada's April 22 rate meeting.  Economists surveyed by Bloomberg predict the Bank of Canada will lower rates 1/2% within its next two meetings.  Canadian Press cites economists who also predict a 1/2 point drop by June 10.

As for the BoC's public outlook, it hasn't changed much in the last month.  On Thursday, Longworth repeated the BoC's line from March, saying:  "Further monetary stimulus is likely to be required in the near term to keep aggregate supply and demand in balance and to achieve the 2% inflation target over the medium term."

Nonetheless, while rates seem to be trending lower, you never really know what can happen from week to week.  Don't bet the entire ranch on rates plummeting and staying there.  Bloomberg, for example, says: "The nation's growth, international trade and housing data have [all] beaten analysts' forecasts in the first quarter." 

There is therefore a chance--but by no means a certainty--that the BoC is now a little less motivated to lower rates as much as some people expect them to.  Merrill Lynche's David Wolf seems to agree, supporting the notion that recent economic strength implies "the need for less aggressive rate moves.''

Bond Yields Rising

5-year bonds yield yields have bounced quite a bit (44 basis) points from their March 17 multi-decade lows.  The 5-year bond is now at 3.18%--as of this writing. 

Yesterday, 10-year bond yields had the biggest 1-day increase since May 2004.

Given that fixed rates are based on bond yields, this move could slow the fall in fixed rates--for now at least.

Meanwhile, the Bank of Canada's Paul Jenkins is still talking rate cuts in the "near term."  Futures traders are pricing in a 1/4 point cut April 22.  However, Bloomberg's survey of 14 top economists puts the median projection at a 1/2% cut.

CIBC economist Benjamin Tal says, "Best-case scenario is no change over the next few months, with the real possibility of [the Bank of Canada] actually cutting rates. The risk of higher rates at this point is moderate at best."

TD economist Eric Lascelles is more dovish:  "There remains a lot of bad news out there, and plenty more rate cuts to come from central banks."

U.S. Fed Chops Rates. Now It's Canada's Turn

America's key lending rate fell another 3/4% today, and economists expect the Fed to keep on cutting.

Now the ball's in the Bank of Canada's court.  Most economists are looking for another 1/4% to 1/2% cut in our prime rate on April 22.

Some of their reasons:

• There's a 1.25% difference now between central bank rates in Canada and the U.S.  That's the biggest spread since 2004 and an upwards influence on our dollar.  A rising dollar is bad for Canadian manufacturers and exporters.
• Inflation is now at a 6-month low of 1.8%--below Canada's 2% target.
• U.S. auto sales are projected to fall to their lowest level since 1994.  80% of Canadian-built cars are exported to the U.S.

Canadian rate projections of note:

• TD's Dina Cover expects three 1/2% reductions at the BoC's next three meetings
• BMO's Doug Porter expects a 1/2% cut on April 22.
• 13 major economists surveyed by Bloomberg predict the BoC will lower rates a total of 3/4% by June 30.
• HSBC's Stewart Hall says, "it is not unreasonable to expect another 50 bps [cut] again" on April 22.

So what should mortgage shoppers do now?  Dan Eisner of True North Mortgage has this advice: 

"You may want to sit in the variable for six to eight months. You can float the whole time - five years - just ride it out and you'll probably average something better than anything you'll lock into right now. But that's not a risk everyone's willing to take."

Oddly enough, an RBC poll suggests only 15% of Ontario homeowners planning to buy in the next two years would choose a variable-rate mortgage.  That seems low.  By contrasts, we've seen over 75% of our clients requesting variables the past few months.