The Bank of Canada did as expected today and announced it is increasing the target for the overnight rate by 0.25% to 0.75%. There was some debate earlier in the month whether the central bank would actually continue increasing interest rates, but after the strong job report that was released mid-month announcing that a record number of jobs were created in June, it became apparent that Bank Governor Mark Carney, now had strong justification to increase rates again.

Some key items in the release included:

Globally

In Canada

• 2010: 3.5%
• 2011: 2.9%
• 2012: 2.2%

They then closed the announcement with a warning that:

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

This means that another rate hike at the next meeting on September 8th, 2010, is not guaranteed. They will have to see how the Canadian economy is fairing along with the rest of the world, and some economists believe they may ‘pause’ rate hikes to see the effects of previous increases thus far.

What this means for variable mortgage holders, is that your variable mortgage rates will increase by 0.25% tomorrow.

Keep in mind that the Bank of Canada’s key interest rate doesn’t directly affect fixed mortgage rates, they’re affected by bond yields, and after the last announcement we actually saw fixed mortgage rates come down as bond yields decreased.

You can compare how this announcement has affected the latest variable mortgage rates here.

The Bank of Canada (BoC) made their much anticipated interest rate announcement this morning June 1, 2010 and the verdict was an increase in the target for the overnight rate by 0.25% to 0.50%. This is the first interest rate increase by the Canadian Central Bank since 2007. Opinion has been divided over the past month on whether Governor Mark Carney would actually increase the Bank’s key interest rate.

After the last rate announcement where the BoC removed their conditional commitment to keep interest rates level until July, many thought that that was a definite indication that rates would go up before then.

However, with increasing concern about how Greece’s debt troubles would affect the global economy and signs that the housing market was slowing down in Canada, expert opinion gravitated towards the opposite spectrum with the consensus that the central bank didn’t want to tighten the economy too soon and stop the economic recovery before it really got started. Recent strong economic data started swaying consensus back to a rate hike and it looks like the initial opinions were right.

Our Mortgage Rate Outlook Panel also thought the Bank of Canada would increase rates today, and as a result thought variable rates would also increase in the short term.

Here are some of the main comments the Bank of Canada cited in their announcement this morning:

• The global economic recovery is proceeding but is increasingly uneven across countries, and most of the G7 countries recovery are dependent on continued stimulus
• The debt problem in Greece and its effect on the Euro will increase borrowing costs in Europe, but Canada has not been affected just yet although we’ve seen a small fall in commodity prices
• The economic recovery in Canada is going on as they expected with q1 2010 growth of 6.1% driven by housing and consumer spending
• Inflation has been in line with the Bank’s projections

The statement ended with an interesting bit of information as this latest announcement “leaves considerable monetary stimulus in place” meaning we’re still doing a tremendous amount to help the economy and we’ve simply moved the key interest rates up from effectively 0% – so don’t over-react.

Also, many experts have been saying that this is the first in a continuous string of interest rate increases to get us back to “normal” levels, however, the Bank of Canada said that their is still considerable uncertainty and further rate increases are not a given.

Now let’s sit back and see how the bond markets and the big Canadian banks react to this news.

It’s been an intriguing time in the mortgage market over the past few months and it really all kicked off in December 2009 when Finance Minister Jim Flaherty announced the latest mortgage regulation changes. Since then we’ve had mortgage rates jumping all over the place as bond yields, which influence fixed mortgage rates, rose rapidly in March and have now dropped off again, and the upcoming HST intro on July 1. Interestingly, mortgage rates haven’t declined as rapidly as they rose, so I thought it was a good time to see how this compares against historic data.

A quick look at the historical 10 year weekly results for the Government of Canada 5 year bond yield against the posted 5 year fixed rates of the banks shows the following mortgage rate trends (you can visit here for a detailed explanation of how bond yields affect mortgage rates:

5 Year fixed mortgage rates trend

Posted 5 year fixed mortgage rates vs Government of Canada 5 year bond yields
Last 10 years

Source: Bank of Canada

The historical 10 year spread between these was 2.72%, while last week’s spread was 3.41%, which is 25% higher! You can see at the far right of the chart that the spread starts to increase, so isolating this over the last year we get the following:

Posted 5 year fixed mortgage rates vs Government of Canada 5 year bond yields
Last year

Source: Bank of Canada

Now the 1 year spread between these was 3.02%, resulting in last week’s only being a moderate 13% higher. Even with last week’s 0.11% drop in the 5 year fixed rates and today’s 5 year bond yield of 2.56% the spread is still relatively high.

Yields have dropped recently due to growing concern about the debt crisis in Greece spilling over and affecting North America along with decreased consumer confidence here at home. But hopefully we should expect fixed rates to come back down if yields stay where they are – especially if we compare today’s spread against the historic data.

The Canadian Mortgage Trends blog had an interesting post today about how some lenders are offering bonuses to sell mortgages at above-market rates. So as yields have come down rather than lowering their rates, some lenders are throwing out incentives to sell mortgage at higher rates. This is another great reason to make sure you compare mortgage rates before making any decisions.

It looks as though many lenders had expected fixed mortgage rates to continue rising or at least remain stable and have now been caught out by yields dropping. The big banks have recently said that they don’t like changing rates all the time as it throws off their sales staff and causes customer disruption. I think if it helped Canadian mortgage shoppers save money – we’d all be for a little disruption.

For further mortgage rates trends you can always refer to our Mortgage Rate Outlook Panel which includes top mortgage experts providing their short term outlook on the reasons why mortgage rates should go up, down or remain unchanged in the next 30 – 45 days. Our next release will be early June 2010.

Kelvin

The mortgage industry has weathered the perfect storm over the past 3 weeks as we’ve seen:

As a result, mortgage applications and deals have increased as some brokers are experiencing 20-25% of their full year’s volumes in just the past few weeks and once variable rates start moving that should also lead to another busy time.

So I was wondering – have Canadian mortgage consumer’s behaviour changed over these busy past few weeks?

I ran some stats today to see what the outcome was and specifically looked at:

The Bank of Canada had their April rate announcement today and reported that they will be keeping their key interest rate, the target for the overnight rate steady at 0.25%.

Although this doesn’t come as a surprise, the most alarming piece of news in this announcement is that they have removed the conditional commitment to hold rates at their current level until the 2nd quarter of 2010 (July 2010). This is a big change as commitment has been in place since April 2009 and was introduce to provide guidance during the global economic crisis. This was an exceptional move and many industry observers believed they would not increase interest rates until July, because their conditional commitment was taken by the market as a promise, and if they failed to hold that promise, they’d never be able to provide this kind of guidance again – as no one would be sure if they’d stick to it. See our article on the “Two Camps“.

So this tells us that the economic recovery and inflation are climbing quicker than expected and the Bank of Canada felt compelled to make this change. This signals that interest rates will start rising at the next rate announcement meeting on June 1, 2010. As this is the main rate that influences Canadian variable rates, this means that variable rates could also start rising in June from their current levels at around 1.70%.

The press release highlighted the following reasons for removing the commitment:

While in Canada:

Negative signs:

After the big fixed mortgage rate increase at the end of last month, many people are now looking for indications of when variable mortgage rates could follow. As variable mortgage rates are influenced by different factors than fixed rates, the largest being the Bank of Canada’s key lending rate, the focus has turned to Bank of Canada’s Governor Mark Carney, and when he could start hiking rates from their all time lows.

The Globe and Mail had a story today outlining the 2 seperate camps that have evolved as to when rates could rise. The difference relies on Mr. Carney’s use of the term “conditional” commitment to keep rates at 0.25% until the end of Q2 2010 depending on the inflation levels. The camps are:

The Two Camps

1. “Conditional” means conditional – The Central Bank’s first interest rate announcement after the commitment deadline is July 20. His unique guidance last year providing a term that they would look to keep rates at their current levels was meant to provide stability during the global economic crisis. If inflation goes beyond the 2% target level, as inflation control is the Bank’s main mandate, they would need to act and increase rates. His commitment was never meant to totally tie his hands completely, hence his use of term “conditional”.

2. Bank’s commitment must be honoured – The second camp believes that for the Central Bank to keep credibility they need to stick to the June 2010 deadline. Even though current rate of inflation is slightly above the 2% target, in order for them to be able to influence markets again in the future with this type of guidance, they need to honour the commitment, rather than break what they believe to be as an explicit promise.

The Bank could get around these issues by keeping their promise to keep rates steady until July 2010, and then just increase rates more aggressively. So rather than have a 0.25% lift in June and a similar one in the following month, they could only increase the target for the overnight rate by 0.50% in July. Which is better? That’s very tough to say, but one could argue that a slow and steady increase is better than surprise, larger shocks.

The Bank of Canada is releasing a few key reports in the next 2 weeks which greatly help provide transparency into what they could be forced to do.

Retail banks rate increase forecasts

The big banks are also starting to publish when and how much interest rates are likely to increase as follows:

Here is how they are forecasted to increase by the end of 2011:

To stay on top of when rates change, we offer a few tools:

Other lenders are starting to follow RBC, TD & Laurentian Bank’s fixed mortgage rate increases yesterday, as Scotiabank, National Bank and CIBC announced their own changes to their posted residential mortgage interest rates, effective March 31, 2010.

The biggest increases were all the 5 year posted fixed rates going up by 0.60% to 5.85%.

Here are the rate changes:

Scotiabank

– 3 year closed      4.50%      (+0.20%)
– 4 year closed      5.34%      (+0.40%)
– 5 year closed      5.85%      (+0.60%)

Scotiabank’s discounted rates changed as follows:

– 5 year fixed closed 4.55%      (+0.60%)    

CIBC

CIBC changed their fixed mortgage rates as follows:

3 year closed      4.35%,     (+0.20%)

4 year closed      5.34%,     (+0.40%)

5 year closed     5.85%,     (+0.60%)

Expect more and more of these announcements this week.

You can compare these mortgage rates against other banks and brokers to see what the best mortgage rate is in your area.

The past few week’s speculation that mortgage rates were going to increase sooner rather than later came true today as RBC was the first major lender to increase its fixed mortgage rates. RBC announced they were increasing the 3, 4 and 5 year posted fixed rates by 0.20%, 0.40% and 0.60% respectively.

Even the special, discounted rates were changed the same amounts. This comes after these same fixed rates were lowered just a few weeks ago. TD also announced they were increasing the same rates by the same margin and you can expect the other big banks to follow. These changes will take effect tomorrow, March 30, 2010.

RBC mortgage rate changes

Fixed Rate Mortgages

Three-year closed 4.35 per cent (+0.20 per cent)
Four-year closed 5.34 per cent (+0.40 per cent)
Five-year closed 5.85 per cent (+0.60 per cent)

Special Fixed Rate Offers*

Four-year closed 4.29 per cent (+0.40 per cent)

Five-year closed 4.55 per cent (+0.60 per cent)

TD’s updated mortgage rates

Fixed Rates To: Change:

6-month convertible     4.60%     no change
1-year open     6.55%    no change
1-year closed    3.65%   no change
2-year closed    3.95%   no change
3-year closed    4.70%   +0.40%
4-year closed    5.34%   +0.40%
5-year closed    5.85%   +0.60%
6-year closed    5.80%   no change
7-year closed    5.99%   no change
10-year closed    6.30%   no change

Special Fixed Rate Offers     To:     Change:

4-year closed    4.29%     +0.40%
5-year closed    4.55%     +0.60%

Variable Rates     To:

VIRM closed    TD Mortgage Prime
VIRM Open     TD Mortgage Prime + 0.80%

See how these mortgage rates compare to the market, and if it may be time to lock in.

RBC released the results of their 17th Annual Homeownership Survey of 2,000 Canadians in early January which showed that 64% expect mortgage rates to increase in the next year versus 66% of mortgage holders.

Other findings include:

The release also included a few tips for homeowners:

1. Look into your prepayment options – and take advantage if you can

2. Pay down higher cost debt – for example use a lower interest line of credit to pay down higher interest credit card debt.

3. Have a strategy to pay off your home equity line of credit.

We all know mortgage rates are near all time lows and that rates will inevitably go higher. Long term bond yields, which affect fixed mortgage rates, have increased over the past few weeks, so we’d expect fixed rates to increase as well. But that didn’t happen. Many of the big banks are doing a massive market share push right now, and have surprisingly decreased fixed mortgage rates despite bond yields increasing. Variable rates have stayed constant as the Bank of Canada recently re-iterated there conditional commitment to keep them at this level until the summer, although we’ve seen a slight increase in the discounts to prime with a Prime – 0.55% or 1.70% 5 year variable come out last week.

This has resulted in people starting to prepare for the rate increases, and much talk in the media over the past week about mortgage penalties. When you take out a mortgage, it is a contract that comes with a commitment, but like many contracts, there is an out clause if you’d like to terminate the contract early. However, that out clause comes at a price – and this is the mortgage penalty fee.

Historically, the penalty fee has been a payment of 3 months worth of interest, but some lenders use the higher of 3 months interest or an IRD or “interest rate differential”. The IRD is based on the difference between your original interest rate and the interest rate that the lender if they were loaning the funds out today. Some banks cheekily use the posted rates to calculate this differential, although that is usually not the actual rate people get for their mortgages.

As different lenders use different penalty calculations, it can be difficult for consumers to know how much the penalty is. As a result, the government announced in the recent budget that as a move towards greater “consumer protection” they would look at standardizing how lenders disclose and calculate prepayment penalties. This is applicable to fixed rate mortgages as variables don’t have IRD penalties.

IRD calculation

Here is an example of how to calculate the IRD:

IRD vs 3 months interest

If you’re looking at refinancing to break your current mortgage and move to a lower rate then you simply need to: