The Bank of Canada met yesterday in the middle of more worldwide economic uncertainty. It is no surprise that they were a little more “dovish” in their speech. For those of us who don’t speak economist, this means that the Bank of Canada is not concerned with inflation and therefore not looking to increase interest rates in the near or foreseeable future. The news coming out of Europe and to a lesser extent the United States and Canada will at a minimum hold the Bank of Canada from raising our countries prime rate longer than initially anticipated by the market.
Coming up to yesterday’s announcement bond yields dropped dramatically. We have been educating our customers for some time now on the direct relationship between bond yields and fixed mortgages rates, so it should come as no surprise to you that mortgage rates will drop in the coming weeks. Unfortunately Canadian Lenders don’t like to drop interest rates as quickly as the increase them so we may have to deal with a few more weeks of profit taking before we see interest rates on the 5 year fixed rate drop. But don’t fret it won’t be long before we are enjoying a 2.99% 5 year fixed rate, or lower.
For those of you interested in just how much the Banks are making on residential mortgages right now; the Government of Canada 5 year Bond yield is 2.09% lower than the discounted 5 year fixed rate mortgage. For a healthy Bank profit this spread should only be 1.5%, keep this in mind the next time you want to negotiate with a mortgage lender, we certainly do!
Another development from all this economic uncertainty has been the impact on variable rate mortgages. The market has started to predict the possibility of a drop in the Bank of Canada’s prime rate as a move to stimulate the economy. Although we do not see this as a possibility it would be interesting to see the impact of a further drop in the prime rate on housing prices and fixed mortgage rates, can they actually go lower than 2.99% on a 5 year fixed rate? Those of you out there who feel that economy is in really bad shape and believe that we might be in store for more bad economic data might be in this camp but in my opinion it is simply the market overreacting. This morning the European Central Bank held their key interest rate steady at 1% and there should be no reason for Canada to drop rates in the foreseeable future.
What this economic uncertainty will likely not curtail is the Governments continued efforts to regulate the behaviour of the Canadian Mortgage Lenders. Look for more changes in the coming months to the mortgage lending rules as the Government of Canada and the Bank of Canada look to slow our red hot housing market.
As always we leave you with a caution, it is more important now than ever to be careful when you are mortgage shopping, some lenders have very restrictive terms on their cut rate mortgages and there have been far too many horror stories of Banks not informing their clients of the draconian terms of these contracts. If you are looking for a mortgage or simply need some unbiased advice regarding prepaying or breaking your mortgage, go to a Broker you trust. Don’t deal directly with a Bank.
At MorCan we work to ensure that you receive the lowest available rate on the market from the day you obtain your pre-approval right up until your closing date. So if you are closing on a home at the end of August you are guaranteed to receive the lowest market rate available between now and then.