Interest rates have been steadily increasing over the past few weeks. This should come as no surprise to anyone reading these newsletters. We do anticipate that rates will increase further before slowing down and probably heading back down to lower levels. Royal Bank is increasing their rates tonight, on the back of stronger bond yields which telegraph the mortgage market moves.
The consensus at the major Canadian Banks is for an increase of the prime rate by 2.5% over the next year and a half. Some banks feel that rates will increase faster than others, but the consensus has changed dramatically. It is entertaining that the group that previously believed that we were in the worst recession since the 1930’s; now sees growth from Canada and the United States coming in at record levels.
We don’t scare that easily.
Although we recognize that Stock Markets around the world are returning to their lofty positions and that newspapers are finding plenty of great economic data, we believe that a rapid acceleration of interest rates in Canada will only highlight the sensitivity in the market.
The language coming from the United States is clearly cautioning that the recession is far from over, and that rates will have to stay low for some time. It is these low rates and emergency Federal Reserve policies that are tantamount to throwing free money at the Banks to invest in the market. The free money was initially risk averse on the soured market, which was represented in the time it took for things to bounce back, but it is now starting to find its way into riskier investments in search of higher yields. It is important to understand that once the trough is removed from the pen the pigs will starve (read: politically connected American Financial Institutions will sell the market lower on the first indication that rates will increase).
As Canada continues to show better economic numbers related to housing, job growth and consumer spending an argument can be made for increasing interest rates.
But 2.5% over 18 months?
Such an increase would lead to a huge increase in the Canadian Dollars price relative the American Dollar, not to mention a massive drop in housing prices, stemming from an increase in the cost to service debt across the country.
The Bank of Canada has thus far done a great job of managing us through this recession and we feel that they will continue to do so.
Although no one has a crystal ball we expect to see a more gradual increase in rates over the next 18 months and strongly believe that variable rate mortgages will still be a winning pick.
For anyone who is concerned about interest rates moving out of reach on fixed rate mortgages, please call us, we are more than happy to provide you with a recent Mortgage Strategy Report, and even lock in a rate for you, should you require.
CMHC Changes Taking Effect
CMHC announced several weeks ago that some changes would be made to the underwriting policies applied to mortgages in Canada. There are 3 major changes that will take effect on April 17th, 2010.
1) The Qualifying rate used on mortgage applications will increase, this will make it more difficult to qualify for a mortgage as a persons income will be weighted against a mortgage payment that is calculated based on a higher interest rate than that which the client is taking. For those of you looking for a property, please keep this in mind.
2) Refinances will no longer be done to 95% of the value of a home. For anyone looking to consolidate their credit the amount of money they will be able to harness from their property will decrease. Although this does protect CMHC from a risk prospective it will negatively impact cash strapped Canadians looking to reduce their high interest rate debt.
3) Canadians looking to buy rental properties will have to jump through more hoops to qualify for mortgages on those properties and will be forced to increase their down payments to 20% in most cases.
If you have any questions please do not hesitate to give us a call.