[GUEST POST] Why Mortgages Are Super Confusing Right Now
The post below is a guest post by Calum Ross. Calum Ross is an internationally recognized leader and speaker in the field of mortgage banking and financial planning with a strong commitment to driving positive change within the mortgage industry.
Last week was super confusing time in mortgages and here is why:
1) The Bank of Canada is telling us that overnight rates and thus prime rate will remain low. For what they actually said see below.
2) The bond market (which is much more a predictor of fixed term mortgage rates) crossed over a 25 month high. There a number of reason for this which are also listed below.
3) Last week the Finance Minister indicated that Ottawa was looking at more mortgage rule tightening – we don’t know when this is coming but it is not going to include more favourable rules for Canadian mortgage borrowers
For those more keen – read below …and I am always happy to explain the broader based economic situation to clients …I sat through over 7 years of post-secondary finance education so you don’t have to! Trust me – pretty much everything in life is a lot more fun than sitting through hundreds upon hundreds of hours of economic classes.
What the Bank of Canada said last week with their announcement:
The Bank of Canada sets interest rates based on where it believes inflation is going to be 18-24 months from now. Last week it stated the following key things in its release.
1) It acknowledged what everyone knows, that “Inflation in Canada remains subdued…” (Inflation control is the BoC’s core mandate, and the overwhelming reason it changes interest rates.)
2) As long as inflation remains in check, and there is “significant slack” in the economy, and household debt doesn’t come to a boil, current rates will “remain appropriate.”
3) Rate increases, once they finally arrive, will likely be “gradual” and just big enough to keep inflation at the BoC’s 2% inflation target. (Those with memories of the early 80’s can probably safely discard of fears of 300 bps rate hikes in the next few years.)
What the Bond Market is telling us based on market conditions:
The bond that everyone in our industry watches is the 5-year “government of Canada” (GoC). Its yield jumped 10 basis points Thursday to 2.16%, a brand new 2-year high.
GRAPH PERIOD: 6 September 2012 – 6 September 2013
Government of Canada marketable bonds – average yield – 5 to 10 year
Traders have been selling bonds and pushing up long-term rates for four reasons:
1) Positive economic momentum continues down south, which many feel could accelerate our GDP and spark inflation concerns
2) A reinvigorated Canadian housing market (at least temporarily so)
3) Canada’s weakening loonie (which makes holding Canadian bonds less attractive)
4) Continued outflows from global bond markets (the multi-decade bond bull market is deflating, at least somewhat)
* Bond prices and yields have an inverse relationship. If one goes up, the other goes down, and vice versa.
What some key Analysts said:
“The BoC continues to reference language that has us believing they are on hold into 2015” — Derek Holt, Scotiabank Economics
“…We are still looking at a very long period of inactivity by the Bank [of Canada], and may well be talking about four years of unchanged rates a year from now” —Doug Porter, BMO Capital Markets
“…This is a central bank that…is happy to sit on the sidelines and wait for substantial proof [that]…(economic) acceleration is underway before raising rates” —Avery Shenfeld, CIBC World Markets
What should we do now if we are thinking of borrowing?
Regardless of whether rates stay up or go down – any new mortgage rules that will be introduced are not likely to be more client friendly than the current ones in place. When rates go down you get the benefit of the lower rate – thus the benefit is to apply now. If mortgage rules get more lenient (highly unlikely) then you will get the benefit of the more lenient rules by getting approved for a mortgage sooner rather than later. The attached BMO report shows the surprise we have seen in housing this summer and provides some reasons why mortgage rules may need to be tightened up further. I can’t stop the rule changes but I can prevent as much of the negative impact of them as possible – call me today … I would be glad to help!
