This just in data is when mortgage interest rates are expected to rise.
DATA JUST IN
Canada’s latest employment and inflation numbers have triggered new expectations about the next steps by the Bank of Canada and the arrival of interest rate increases.
BoC Governor Tiff Macklem continues to offer soothing words about inflation, which is current running at 4.1%. That is an 18 year high and more than double the central bank’s 2.0% target.
Macklem has repeatedly said high inflation is temporary; the result of low prices during the pandemic lock-downs, and supply chain problems that have cropped-up as the economy reopens.
Macklem points out that a key factor in long term inflation – wage growth – has not materialized. That is despite Canada returning to pre-pandemic employment levels with the addition of 157,000 jobs in September. It should be noted that the growth of Canada’s labour force during the pandemic means the country is still 276,000 jobs short of full employment. Last week however, Macklem did concede that this temporary inflation may linger for longer than initially expected.
Several prominent economists have weighed-in. Benjamin Tal cautions that inflation is a lagging economic indicator. He says the risks for long-term inflation are present and the Bank of Canada would be better to start raising rates earlier to help mitigate those risks. Doug Porter says there is a growing chance rate increases will come earlier. He expects they will happen quarterly rather than every six months. And, Derek Holt would like to see a rate hike by the end of the year, given that emergency levels of stimulus are in place while inflation is well above target.
Look for mortgage interest rates to start going up close to the end of 2021 and continue until they are back close to PRE-Covid Rates of about 3.35% for the 5-year fixed.
Mortgage Mark Herman, best Calgary mortgage broker for the masses!
TD is/ was the 1st and only bank to charge higher mortgage prime rate for their mortgages.
TD is now the 1st of the big banks to now charge interest on their late-interest-owed:
For the 2nd time in 50 years the “Yield Curve” has inverted – meaning that long term rates are now lower than short term rates. This can signal a recession is on the way.
This Means …
- Alberta will look better comparatively to Canada’s hot housing markets which should finally cool down.
- Canada’s Prime rate increases look to be on hold until Spring. This makes the variable rates now look MUCH Better. There were 3 rate increases expected and these may not materialize – making the VARIABLE rate look better.
- Broker lender’s have VARIABLE rates that range between .1% and .65% BETTER than the banks do. If you are looking at variable rates we should look further into this in more detail.
DATA BELOW …
- More on the predictions on rate increases
- WTF is an inverted Yield Curve – lifted from “the Hustle”
Predictions on Prime
Three interest rate hikes in 2019 — that’s what economists have been predicting for months, as part of the Bank of Canada’s ongoing strategy to keep the country’s inflation levels in check. But, according to one economist, that plan may have changed.
The BoC held the overnight rate at 1.75 percent yesterday, and released a statement a senior economist at TD, believes hints that the next hike may not come until next spring.
“We no longer expect the Bank of Canada to hike its policy interest rate in January,” he writes, in a recent note examining the BoC’s decision. “Spring 2019 now appears to be the more likely timing.”
Meanwhile the Canadian rates and macro strategist at BMO, puts the odds of a rate hike in January at 50 percent.
“While the Bank reiterated its desire to get policy rates to neutral, the path to neutral is clearly more uncertain than just a couple of months ago,” he writes, in his most recent note. “Looking ahead to January, the BoC will likely need to be convinced to hike (rather than not).”
A VIDEO ON WHY VARIABLE RATE MAY BE THE WAY TO GO FOR YOUR PLANS
- This video is from my colleague Dustin Woodhouse and he perfectly presents the story on the variable. He also ONLY works in the BC Lower Mainland; if you live there HE should be doing your mortgage, if you don’t WE should be.
2. WTF is an ‘inverted yield curve,’ and what does it mean for the economy?
For the first time since 2007, the 2- to 5-year US Treasury yield curve has inverted. Historically, this has served as a somewhat reliable indicator of economic downturn, which means people are freaking out, which means…
OK, hold up: What exactly is a yield curve, and why is it inverting?
‘Lend long and prosper’ (so say the banks)
In short, a yield curve is a way to gauge the difference between interest rates and the return investors will get from buying shorter- or longer-term debt. Most of the time, banks demand higher interest for longer periods of time (cuz who knows when they’re gonna see that money again?!).
A yield curve goes flat when the premium for longer-term bonds drops to zero. If the spread turns negative (meaning shorter-term yields are higher than longer maturity debt), the curve is inverted…
Which is what is happening now
So what caused this? It’s hard to say — but we prefer this explanation: Since December 2015, the Fed has implemented a series of 6 interest rate hikes and simultaneously cut its balance sheet by $50B a month.
According to Forbes, the Fed has played a major part in suppressing long-term interest rates while raising short-term interest rates.
Yield curve + inversion = economic downturn (sometimes)
The data don’t lie. A yield curve inversion preceded both the first tech bubble and the 2008 market crash.
Though, this theory has had some notable “false positives” in its lifetime — so it’s not exactly a foolproof fortune teller.
Heck, IBM found the size of high heels tends to spike during hard times. As of now, the experts who believe the sky to be falling remain in the minority.
There is lots to digest in the data above. Please feel free to contact me to discuss in more detail.
Mark Herman, 403-681-4376
Top Calgary Alberta Mortgage Broker
A great summary of where we are today in relation to the economy and the housing market.
There have been a couple of highlights for the Canadian housing market in the past week:
- the U.S. Federal Reserve announcement that it is committed to low interest rates until 2015 and
- the latest global housing outlook that puts this country in better shape than most.
Anyone looking for a new mortgage or a mortgage renewal will likely be heartened by the American central bank’s interest rate pledge. The commitment to low rates makes it harder, but not impossible, for the Bank of Canada to move on its desire to increase rates.
However, that desire got a boost from Canada’s economic think-tank, the C.D. Howe Institute. It says the central bank needs to change the way it calculates inflation to take into account rising house prices. The institute says the current calculation keeps inflation lower than it really is and puts the Bank of Canada at risk of keeping rates too low for too long.
As for the global housing outlook, it shows Canadian prices continue to rise, albeit more slowly than a year ago. But around the world, countries showing price declines outnumbered gainers by more than two to one.
With all the hype on the new iPhone 5, this puts it a bit into perspective.
Interesting 3 minute read.
The Globe and Mail
Published Monday, Sep. 17 2012, 8:10 PM EDT
The new Apple iPhone 5 tells us a lot about why you can’t get your financial act together.
The iPhone is a brilliant device – a deluxe cellphone that has become a cultural icon. So important is the iPhone 5 that the announcement of its features and release date – it’s Sept. 21 – were treated globally as a major media event. Who doesn’t now know that the iPhone 5 is 18 per cent thinner and 20 per cent lighter than its predecessor?
A man talks on a mobile phone in front of an Apple logo outside an Apple store in downtown Shanghai in this September 3, 2012 file photo. Although Apple makes billions from new phones, a significant portion of its sales in recent years have come from dropping the price on older models once a new phone or tablet hits stores REUTERS
Apple could sell 33 million iPhone 5s globally this quarter, a tribute to the company’s gadget-building supremacy. But iPhones are also symbolic of a change in society’s attitude toward money. We now get our gratification through spending money rather than by saving it.
The savings rate in Canada has been falling for decades, more or less in line with the decline in interest rates. Today, savings accounts offer less than 1 per cent in many cases and barely 2 per cent at best. As a result, a lot of us have come to believe that saving is useless, even foolish. And so, we’ve moved on to spending.
The iPhone 5 will sell for a suggested retail price between $699 and $899 (depending on how much memory it offers), but in the past it has been possible to pay much less if you sign up for a multi-year wireless phone plan. If an iPhone sounds like an affordable luxury, ask yourself these questions:
However much the phone costs, have I contributed at least that much money, and preferably much more, to my retirement savings this year?
Have I contributed anything at all to my kids’ registered education savings plan?
Do I have any money saved that I can tap if the car’s “check engine” light comes on, if the basement floods, if the orthodontist says my kid really needs braces or if I lose my job?
If you’re covered on all of this, enjoy your new iPhone. Otherwise, you might want to reconsider that purchase because your spending and saving are out of balance.
The roughest rule of saving is that you should be putting away 10 per cent of your take-home pay for the future in a tax-free savings account or a registered retirement or education savings fund. If you’re getting a late start as a saver, your number is higher.
External factors like wage freezes and inflation can affect our ability to save, and today’s low interest rates offer no encouragement. But the biggest impediment is in our own heads. We see more value in spending than in saving.
In a way, spending by consumers is a good thing because it accounts for roughly two-thirds of our economy. But spending takes away from saving in today’s zero-sum economy, where wage growth isn’t strong enough to put us ahead of inflation. The only way to save more is to spend less.
The iPhone and similar devices make that a challenge because of the way they draw you into a web of higher spending. You could buy a cheap cellphone and your wireless phone company would probably give it to you for free if you signed up for a service plan. A basic cellphone would mean simple data needs, so you could probably get away with an inexpensive plan.
With an iPhone, you’ll pay extra to buy the phone and likely face higher monthly plan costs. And then there’s the temptation to upgrade. An iPhone 5 bought this fall could be superseded by something better within 12 months. By then, there will probably be a new iPad and, who knows, but maybe Research In Motion will have turned some heads with the new BlackBerry 10. Every new product is competition for money you could otherwise use to save or pay down debt.
You’re urged to buy things all the time via mass media, but there’s no lobby for saving. Apple had Steve Jobs on its side. Savers are stuck with Benjamin Franklin, who said that a penny saved is a penny earned.
How can we get people saving more, then? By making it automatic, not discretionary. Have money electronically diverted from your chequing account to your RRSP, TFSA, RESP or a savings account every time you get paid. Have some money left over after the bills are paid? Hello, iPhone.
How the savings rate has tracked in the past 50 years
(data taken from first quarter from each year)
Source: Statistics Canada
We all know interest rates are going to go up. Even after reading this the big hit we all know is coming is that variable rate mortgage payments go up right away. The rest mentioned below may come later.
Jason Heath Mar 31, 2012 – 7:00 AM ET | Last Updated: Mar 30, 2012 9:09 AM ET
For three years, the word on the street has been that interest rates have nowhere to go but up. But few Canadian commentators – other than David Rosenberg – got the call on rates right. Although the prime rate has risen since dropping to an all-time low of 2.25% in April 2009, the increase to the current 3% rate that has remained stable since September 2010 has been modest to say the least. Long-term rates, like fixed mortgage rates, have gone up and come back down during that time, such that one can currently lock in fixed rates under 3%.
York University’s Moshe Milevsky did a study in 2001, which he revised in 2007, and determined that borrowers are better off going with a variable rate mortgage instead of a fixed rate mortgage approximately 9 times out of 10. That said, we have to be close to if not already in that 10% sweet spot where fixed beats variable.
Despite the opportunity to lock in low rates today, it could actually be beneficial for the average Canadian for rates to rise. Conditions need to warrant rate increases and the Bank of Canada (which directly governs the prime rate) and the bond market (which indirectly governs fixed mortgage rates) won’t raise rates until the time is right. How soon that time comes depends partially on domestic influences, but also on our neighbours to the south and the current eurozone debt debacle.
Greece is a perfect example of why rates should rise. Greek participation in the European Union gave them access to cheap credit and helped facilitate some of the excess spending that has them where they are today. Despite bond markets demanding higher interest rates on Greek and some other European government bonds, market intervention by the EU has helped keep rates artificially low.
The U.S. Federal Reserve has been doing the same thing, buying up U.S. government treasury bills to keep U.S. rates artificially low as well.
It’s hard to justify how artificially low interest rates for an extended period are good for anything other than delaying the inevitable for some market participants.
Higher rates would have a negative impact on those of us with outstanding debt, as higher interest charges would follow. But Canadian debt levels have moved ever higher in recent years, likely a response to the low rates that have been in place in part to stimulate spending. Higher mortgage rates could protect us from ourselves by making higher debt levels more punitive and less tempting.
Furthermore, fixed income investors could benefit. The emphasis on “could” is key. Rising rates typically hurt those holding bonds because today’s bonds are that much more appealing than yesterday’s as rates go up. How much the hurt hurts is a matter of fact. But those renewing GICs or sitting on cash these days are desperately awaiting higher interest rates to help their savings grow. So higher rates could at least lead to higher returns for fixed income investors in some cases.
Higher rates could benefit stock investors. Once again, the emphasis on “could” is key. Higher rates usually mean the economy is improving and inflation is rising. This could be a good sign that corporate profits and corresponding stock prices are moving higher. That said, one has to wonder if low bond and GIC interest rates and cheap credit have pushed more money into the stock market than should otherwise be there. Rising rates could bring income investors back to the more traditional income investments like bonds and GICs from the blue chip stocks they’ve potentially flocked to in order to obtain yield.
Despite the purported uncertainty above on stocks and bonds, higher rates should at least contribute somewhat to restoring equilibrium to credit, debt and equity markets. Something seems wrong with near zero or negative real interest rates. That is, something seems wrong with a GIC investor earning 2%, paying 1% of that away in tax and 2% inflation resulting in an effective return of -1%. On that basis, something seems right about higher interest rates, whether we like it or not. What happens to mortgage debt, stocks and bonds remains to be seen.
Jason Heath is a fee-only Certified Financial Planner (CFP) and income tax professional for Objective Financial Partners Inc. in Toronto.
Below is a commentary on the possible new rules for Canadian mortgages. Anyone looking at buying with 5% down (which is about 80% of our clients) or using a 30 year amortization (75% of our clients) should look at buying sooner than later.
Comparing New Amortization & Down Payment Rules
Government mortgage restrictions instituted from 2008-2011 have not achieved their goal, suggests Desjardins’ Senior Economist Benoit Durocher.
He wrote this on Thursday: “…The third series of [government mortgage rules] was announced nearly a year ago now, and we must conclude that the tightening introduced to date has not
slowed the market enough.
Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit.”
It almost sounds like Durocher has some inside info.
He adds: “Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).”
Many believe a down payment increase would have a more chilling effect on home prices than the other option being talked about: a reduction in the maximum amortization from 30 to 25 years.
The difference in impact would depend, however, on the degree of rule changes.
For example, raising the minimum down payment from 5.0% to 7.5% (a possibility that’s been discussed) would require that entry-level homebuyers come up with $8,700 more on a typical Canadian home purchase. For most, that’s not totally out of reach.
A five percentage point increase to the minimum down payment is a somewhat different story. Requiring 10% down equates to $34,780 on an average home. That’s beyond the means of a sizable minority of first-time buyers.
First-time buyers are essential to home price stability. They account for 1/2 of unit demand according to Altus Group research. While the latest data suggests that average down payments are somewhere around 30% (an estimated $104,000), first-time buyers put down far less.
That means stricter down payment rules could potentially hurt home values at the margin, if other things are held equal.
In terms of amortization, a government-imposed reduction—from 30 to 25 years—would lower a typical family’s maximum purchase price by roughly 9%. (That’s based on today’s 5-year fixed rates, normal qualification guidelines, median incomes, and average consumer debt.)
To put this in perspective, a reduction in amortization from 30 to 25 years would cut a typical buyer’s maximum possible purchase price by ~$31,000 (again, based on an average income, average debt, a 5% down payment, etc.).
Fortunately, most people don’t need a 30-year amortization to buy a home. Despite 41% of homebuyers choosing extended amortizations, the majority could have qualified with a standard 25-year mortgage. (That said, this doesn’t mean that cutting amortizations across the board is justified. Well-qualified borrowers deserve a carve-out in the rules because they utilize extended amortizations for legitimate cash-flow management purposes. But that’s a topic for another day.)
This is interesting.
We have always thought that the way they do their math was odd or different or something.
Another reason to use a good Calgary broker that has other options than the Big 6 banks that continue to take advantage of their own customers. Why do they do this?
CIBC class action attracts hundreds of inquiries
Lawyers spearheading twin class-action suits against CIBC over “vague prepayment terms” have fielded interest from hundreds of the bank’s mortgage clients — that as a case management judge in B.C. gets assigned to the legal action.
“There have been hundreds of inquiries about these cases to our office and that of our co-counsel in Ontario,” Kieran Bridge, a Vancouver lawyer with the Construction Law Group, told MortgageBrokerNews.ca, pointing to borrowers who paid out CIBC mortgage from April 2005 onward.
Firstline clients areamong those concerned that they may have been adversely affected by the lender’s prepayment policy.
A Case Management Judge has also been assigned, what Bridge calls a key, mandatory step in moving class actions forward in British Columbia.
“We applied in November for a judge to be appointed, in order to move the case ahead, and are pleased this has happened,” he said.
The twin lawsuits were filed in B.C. and Ontario last October, alleging some CIBC mortgage borrowers have been unfairly penalized by unclear prepayment terms giving rise to two substantive complaints.
Aside from what Bridge terms “uncertain and unenforceable language” in contracts dating as far back as 2005, he also points to the mathematical formula CIBC used to determine those prepayment charges, calling them “invalid,” or in legal speak a “miscalculation.”
The suits rely on individual representative plaintiffs in B.C. and Ontario. Each of those two notices of claim alleges CIBC applied terms and conditions to certain mortgage contracts that allowed it “unfettered discretion” in calculating mortgage prepayment penalties.
The suits also allege that the actual amounts of those penalties were themselves in breach of the mortgage contracts.
CIBC will haven’t yet filed a statement of defence against the allegations.
“Because these cases are intended class actions, the normal time limit for filing a Statement of Defence is rarely applied,” said Bridge.”There has been no Statement of Defence filed, and no substantive response from CIBC.”
The assignment of a management judge notwithstanding, the suit still must be certified in order to proceed to trial. That could take a year or more.
The collective legal action effectively echoes some of the more-perennial and broader concerns of brokers, who grapple with the widely varying interest rate differential and prepayment penalties many lenders demand of borrowers. The former, sometimes stretching into the tens of thousands of dollars, has presented a major impediment to helping clients take advantage of historically low rates by switching or refinancing clients before maturity, argue many mortgage professionals.
Those challenges have led to broker calls for industry-wide standardization of penalties.
Undoubtedly, broker-arranged mortgages through Firstline are among the thousands of transactions the dual suit is meant to address, said Bridge, at the same time expressing his support for mortgage professionals.
The B.C. lawyer led a similar case against RBC about ten years ago. It ultimately ended in a settlement, said Bridge.
This article below is good news for everyone with a variable rate – as it looks like they will not go up that fast.
The data below is the most accurate with out any hype that I have seen is a while.
Teetering on the edge of a rate hike
Well we have a better idea of where Bank of Canada Governor Mark Carney stands, and it appears that we’re teetering on the edge of a rate hike.
This comes as no surprise, with many analysts crying for a rate increase for some time now. The question is whether it will be at the next meeting, or the meeting after that, or even before year end.
The key takeaway is that Carney signaled that ‘some’ government stimulus ‘will’ be withdrawn, rather than ‘all’ and ‘eventually’ withdrawn. That means he’s close to pulling the plug. We are looking at growth and employment numbers for the second half of the year and if it remains strong, we may see rates move before year end.
With this week’s announcement put on the backburner, analysts are focused on where we’re going over the next several months, and they certainly have a lot to consider in their projections.
The Bank has a goal of a neutral rate, which bolsters the economy yet controls inflationary pressures. There’s no magical ‘neutral rate’, but economists figure it’s in the 3%-4% range. However, Carney seems reluctant to pull the trigger on rates, considering the likes of the U.S. economy along with the issues we see in several European countries. If we widen the rate gap with the U.S. it will only drive the loonie up further, creating more resistance for economic growth.
Another external factor is the European sovereign debt crisis, in which Carney senses more concern over their troubles that the U.S. will default on its debt. The chances of the U.S. defaulting on its debt is slim and more of a scare tactic than anything. Don’t get me wrong, it’s a huge problem and the Obama Administration doesn’t know whether to turn left or right, but at the same time, if the US defaulted we’d be talking about a whole new worldwide fiasco.
Since the Bank of Canada doesn’t declare what a neutral rate is, it’s hard to determine when and how much rates will move when they do. By the way that Carney is talking it appears as though when rates do start to rise that they will in a controlled manner and they won’t be too aggressive. Analysts and economists shouldn’t assume that rate increases are going to be quick and steep.
Here at home our economy seems to be moving along as projected, and any sudden, high rate increases will be sure to stifle our growth. It looks like if everything goes to plan we may see a modest hike in October, but if some of the assumptions are off a bit it may be later before we see any movement.
Prime stayed at 3% today and as below rate hikes are coming as soon as we are past the recession for good. These super low rates are the tail end of the recession so take advantage of them while you can. Call to discuss what that means for you. 403-381-4376
Bank of Canada sees hikes on the horizon
OTTAWA — The Bank of Canada held its benchmark interest rate steady on Tuesday, as widely expected, as the global economy remained fragile amid debt problems in Europe and the United States.
But the central bank hinted higher borrowing costs could be coming sooner than later if the domestic economy maintains steady growth.
The bank’s lending rate has been at a near-historic low of one% since last September in an effort to spur economic growth following the downturn.
“To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be withdrawn,” the Bank of Canada said in its interest rate statement. “Such reduction would need to be carefully considered.”
Avery Shenfeld, chief economist at CIBC World Markets, “may be nudging the market into pricing greater odds of at least a modest dose of interest rate hikes before year end.”
“It dropped the word ‘eventually’ in reference to the need for rate hikes ahead, and while saying some of the pressure on core inflation is ‘temporary,’ it also attributed some to ‘more persistent strength in the prices of some services’.”
The Bank of Canada on Tuesday also revised its economic growth outlook for 2011 to 2.8%, down from the previous estimate of 2.9%. Left unchanged were growth forecasts for 2012, at 2.6%, and 2013, at 2.1%.
“Of course, the troubles abroad and challenges to net exports kept the bank from hiking as early as today, and it is still assuming a resolution of the eurozone debt issues,” Shenfeld said. “But signs of better growth in the U.S. and Canada in the second half would clearly be enough to tip the bank into hiking, and we should have enough of that evidence on hand by October.”
Still, some economists have pushed back the possibility of a rate hike until early next year due to continuing uncertainty outside Canada’s borders.
“Weighing-in on the stand-pat side, the U.S. economic soft patch is dragging on, as we count down to potential ‘credit events’ on both sides of the Atlantic,”said BMO Capital Markets economist Michael Gregory.
“Pulling on the tighten-soon side, Canadian domestic demand performance in Q2 might not be as bad as initially posited, owing to a surprising surge in home construction, while the output gap could be smaller . . . and closing quicker . . . if the latest Business Outlook Survey is any guide.”
The Bank of Canada is expected to provide more details on its economic outlook on Wednesday when its releases its Monetary Policy Report.