It’s been a crazy couple days in the bond market. Here’s some additional info to chew on: The bond yields have taken another huge hike today. At last check, the bond yield is up to 2.86%. That is a jump of 22 basis points today and 44 basis points in the last two days. The Spread is down to 1.13% based on that update. The banks fixed-rate products are largely dependent on what is happening in the bond market. In light of this, some of them have already raised their 5-year rate by 35 BPS.
Are we in for rate increases? What’s the best decision to make in light of this recent buzz? Let’s talk about it! Each person’s situation is different so please feel free to give me a shout.
Are you currently in a Variable Rate Mortgage, a Prime Plus Mortgage, or a Fixed Rate Mortgage?
Do you have 18 months or less remaining on your term?
If so, contact me right away to talk about locking in at some of the lowest Fixed Rates we’ve seen in years. By years, I mean that we are hitting some of the lowest rates in history!
A Fixed product might be the best option for you. Let’s discuss it. Talk soon!
Taken from Paul Vieira, Financial Post, with files from Reuters. Published: Monday, August 24, 2009
OTTAWA — Despite growing confidence that economic growth is in the offing, monetary policy around the world is likely to remain “ultra-accommodative,” perhaps until 2011, as doubt remains as to whether or not the growth expected this quarter is sustainable, analysts say.
That is the view emerging following the weekend gathering of the world’s leading central bankers in Jackson Hole, Wyo., highlighted by remarks from Ben Bernanke, U.S. Federal Reserve chairman, who warned of the uncertainties ahead, and Jean-Claude Trichet, president of the European Central Bank, who suggested he is in no rush to reverse emergency stimulus measures.
“The key message from Jackson Hole was … that monetary policy is likely to remain ultra-accommodative for the foreseeable future – at least for the next several years,” said Julian Jessop, chief international economist at Capital Economics of London.
“It seems more likely that there will be no increases in interest rates in any of the major economies over the next 12 to 18 months.”
Strategists at RBC Capital Markets concurred, adding in a note released Monday: “We continue to believe the economic backdrop will warrant a significant additional period of low rates. Indeed, even at the Jackson Hole conference, there was not even a suggestion that we should be braced for anything other than that outcome.”
This outlook applies to Canada as well. Banc of America Securities-Merrill Lynch, as part of global report on monetary policy, said it does not expect the Bank of Canada to begin raising rates until 2011 – well past its pledge to keep the key policy rate, at 0.25%, until June 2010.
Canada has a significant output gap – the difference between potential and real gross domestic product – and the rate at which money is deployed in the economy, or money velocity, has shrunk 15% since late last year even though the central bank has taken its target rate to its lowest possible level, the BofA-Merrill Lynch analysis indicates.
“To compensate, we think the Bank of Canada will probably need to keep rates lower… to ensure that money creation remains in the double-digit [growth] territory needed to re-inflate the economy and close the output gap.” the report says.
John’s Wednesday Words of Wisdom
A fixed rate is an interest rate that does not change throughout the course of your mortgage term. With the same interest rate, you have a regular interest payment and you know the exact amount your payments will be each month. This can make personal budgeting easier. Having a fixed rate makes it possible for you to figure out how much of your mortgage you will have paid off by the end of the year.
“Some people like fixed rate because if they fix the rate for three years, they know exactly what their mortgage payment will be for three years, and in three years’ time their interest rate will not have changed. It gives them peace of mind”
A variable rate is an interest rate that fluctuates with the market during your mortgage period. They provide a lot of flexibility and are especially appealing when interest rates are on their way down. Although your mortgage payment typically remains constant, the ratio between your principal and interest rate fluctuates. If interest rates go down, more money goes toward repaying your principal, helping you pay off your mortgage faster. If interest rates go up, you pay more interest and less principal. If they rise substantially, the original payment may not cover both the interest and the principal. The portion that is not paid is owed, and you could be asked by your lender to increase your monthly payment. Historically however, it is the variable product that has saved people the most amount of money. Please click on the following graph:
“Remember… not all mortgages are created equally. Variable rate products vary from lender to lender. Making sure that your variable rate mortgage has the ability to convert to floor rates of the day is only one of the benefits of having a mortgage professional in your corner.”
Some customers follow interest rates closely and will call their lender to switch from variable to fixed, but many customers do not. And if you’re not following interest rates regularly, you may miss out on opportunities to save money. This is where a competent mortgage broker comes in handy. They can alert you when rates are on the move, and their reasons for doing so.
As of July 2009, a five-year variable mortgage can be had for about 2.5% to 2.85% and a five-year fixed mortgage for about 4.09%, so there is a definite difference between the two at this point in time. But given the current challenging economic climate, some people still prefer the stability of fixed mortgages. The premium of over a percent is justified with the peace of mind borrowers get from having a fixed rate. Historically, a fixed-rate mortgage of less than 5% doesn’t happen very often, so perhaps this is as good as it gets or as close as it gets in terms of fixed-rate mortgages?
Either way, I am here to answer any and all of your questions. I can direct you in making the correct decision between fixed or variable. Each of them has their pros and cons. Once we have spoken, it will become evident what type of client you are. You will leave with the satisfaction of having a complete understanding of both fixed and variable rate mortgages.
The U.S. and Canadian central banks are promising to keep borrowing rates at record lows well into next year as they seek to foster a recovery that both institutions say won’t hit its stride until 2011.
Both the U.S. Federal Reserve Board and the Bank of Canada signalled yesterday the recessions in their countries are all but over, echoing their counterparts at the Bank of Japan and Reserve Bank of Australia, which published similar assessments.
But just as they agree the worst is over, Fed chairman Ben Bernanke and Bank of Canada Governor Mark Carney are united in their nervousness over the fragility of a rebound that is being fuelled almost entirely by benchmark interest rates that are near zero and hundreds of billions of dollars in short-term government spending.
North America’s climb out of the deepest global recession since the Great Depression is being slowed by rising unemployment that is a threat to consumer confidence and an impediment to domestic spending.
The two central banks said those concerns are offsetting what would otherwise be stronger gains from better financial conditions and increasing signs that economic activity is expanding in other parts of the world.
“I want to be clear: We have a very long haul here,” Mr. Bernanke said during three hours of testimony to the U.S. House financial services committee. “It’s not going to feel like a very strong economy.”
Mr. Bernanke, who returns to Capitol Hill today to complete his semi-annual report to the U.S. Congress by submitting to questions from senators, reaffirmed that he intends to leave the federal funds rate at “exceptionally low levels for an extended period of time.”
The benchmark U.S. lending rate is currently in a range of zero to 0.25 per cent, while Canada’s key overnight target is 0.25 per cent, the lowest it can go without roiling short-term money markets.
Mr. Carney, through the Bank of Canada’s latest policy statement, recommitted to keep the overnight target at 0.25 per cent until June, 2010, conditional on an unexpected burst of inflation.
Economic conditions in Canada have improved enough to warrant a brighter outlook from the central bank.
Mortgage rates are expected to remain within 25 to 75 basis points of their current level for the remainder of 2009, according to CMHC’s second quarter Housing Market Outlook, keeping them “very low in a historical context.”
“Movements in mortgage rates are difficult to predict due to volatile economic conditions,” the report stated. “Nevertheless, rates are expected to remain steady this year and edge higher in 2010.”
Along with mortgage rates, CMHC listed employment, net migration and low birth rate as having key effects on residential construction, and forecast housing starts to decline to 141,900 in 2009 (most notably in Alberta and Saskatchewan) before rebounding to 150,300 in 2010.
Now… don’t get too excited, but there are some encouraging signs from both sides of the border suggesting that we are getting close to the bottom of this recession. In fact, we are already starting to accumulate the ammunition we might need to fuel the recovery.
For the first time in many months, both US and Canadian investors are not adding to their cash positions. In fact, we are starting to see a reversal of this trend—a bullish signal since these mountains of extra cash ($1.1 trillion in the US and close to $90 billion in Canada) will be redeployed.
With commodity prices stabilizing, the gap between nominal and real GDP in Canada is narrowing back to its long-term average. This means that real economic variables such as real GDP will be much more relevant to corporate profits—eliminating a source of uncertainty and volatility in the market
The pace at which house prices in Canada are falling is moderating and at this rate, this housing market correction (from a national perspective) will end up being a mild one—both in absolute and relative terms. In fact, the notable improvement in housing affordability is injecting some life to the mortgage market, encouraging new purchasing and refinancing activities. Consumer confidence in both countries is starting to improve, while retail sales are surprisingly on the upside.
