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.

RateSupermarket.ca’s President, Kelvin Mangaroo, was asked to have a chat with Jacqueline Milczarek, Anchor, CTV News Today and CTV News Weekend, about the Bank of Canada’s upcoming expected interest rate hike and how that will affect mortgage rates.

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.

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:

Have you ever been shocked by how quickly a special occasion can arrive on your doorstep? The anniversary of an event that feels like it took place only yesterday; or the deadline that approaches with such urgency you’re caught off guard and left unprepared. Who else has found themselves sitting up at 2am on Christmas Eve wrapping gifts or baking cookies?

Time flies.

Last April when the Bank of Canada governor Mark Carney dropped the overnight target interest rate to an all time low of .25 per cent, he warned that rates were likely to increase in July 2010. Time has flown again and an interest rate hike is now looming.

Since the beginning of the year, speculation has grown about rate hikes taking place sooner than July, mainly due to the pace in which the Canadian economy seems to be recovering from last year’s economic crisis.

The latest Consumer Price Index (CPI) from Statistics Canada is adding fuel to those speculations. Core inflation, the inflation number that strips out the most volatile items like energy and certain foods, is sitting at 2.1 per cent for the past 12 months ending February. This is up from 2.0 per cent ending January, and ahead of economists’ expectations of 1.7 per cent in February.

Carney’s commitment to keeping the overnight rate at .25 per cent was always reliant upon core inflation staying in check, preferably at a rate below 2.0 per cent. Back in April, the BOC didn’t expect inflation to hit this level until the latter part of 2011.

So this news changes things up a bit. Canadians may see interest rates start to creep up to more normal levels sooner than expected. And an increase to the overnight lending rate will no doubt result in a hike in variable mortgage rates.

Don’t worry, you still have some time

If you’re someone that’s been putting off refinancing your mortgage, or purchasing a new home, now’s the time to act. Follow this 5 point action plan to take advantage of low mortgage rates before the rate hike hits.

Your pre-rate hike action plan

1. Gather information

Dig out your mortgage documents. Typically these can be found in the bottom of a filing cabinet or in a pile of papers labeled ‘important documents’ – discount flyers for the local pizza place are often filed away more strategically.

Familiarize yourself with the terms of your contract – what interest rate are you currently paying? What type of mortgage are you on? When are you due to refinance and what’s the penalty for breaking your existing agreement? This type of information is needed to determine your options.

Also, find out what rate your current lender is offering new customers. Compare this to the mortgage rates offered by competitors including brokers and specialty lenders. This will help you determine the benchmark for a competitive mortgage rate.

2. Speak to your existing lender or shop around

You can’t get what you don’t ask for. If you’ve been loyal to your existing lender and can show a track record of making payments on time, ask to be rewarded.

Call the customer service department and let them know that you’re looking around for a better rate. Depending on your contract, they may offer you a new blended rate, a combination of your existing mortgage product and a new mortgage product, which will result in a lower rate than the one you’re on now.

All too often customers will simply sign the mortgage renewal letter from their bank without even thinking about asking for a better offer or comparing the market. It’s easy to get comfortable with your lender, but just be aware that complacency comes at a cost.

If your lender doesn’t offer you a competitive rate, don’t be afraid to look elsewhere. Thanks to the internet it’s easy to compare mortgage rates offered by banks, brokers, specialty lenders and even credit unions.

Many lenders are making a grab for market share and as a result are offering some pretty attractive deals. CIBC is even offering up to $4,000 cash back to customers who switch their mortgage to them. Switching lenders might result in some extra paper work, but more often than not the savings are well worth the time.

3. Get some professional advice

Let’s be honest, very few people understand the pros and cons of the different mortgage options. Fixed or Variable? Monthly payments or bi-weekly rapid? How much can I afford? The questions are endless.

A mortgage professional can provide personal advice about which product is best for you. They can help you to determine if it’s worth refinancing at current rates given the penalty that you’ll be charged to break your existing agreement. And best of all, a mortgage broker is more likely to find you the best mortgage rate.

The Canadian Association of Accredited Mortgage Professionals recently found that the average Canadian who renewed or renegotiated through a broker saw their interest rate reduced by an average of 125 points, compared with 114 among those who dealt directly with a bank or credit union.
It won’t cost you a penny to use a broker’s services. Mortgage brokers are remunerated by the lender if you purchase the mortgage through them.

4. Lock in a low rate

If you’re still on the fence about switching lenders, consider getting pre-approved by the new lender to lock in the current low rate. Most pre-approvals will hold your rate for up to 120 days at no charge.

This will give you the breathing room needed to make a final decision about your mortgage. If rates start to climb before you’ve had a chance to sign, you’ll be glad you got a rate hold.

This is also a great option if you’re in the market for buying, but haven’t yet found that dream home. With a rate hold you don’t need to rush your new home purchase just because you’re afraid rates are going up.

For those with a variable rate mortgage, it might be time to consider locking in at a fixed rate. This is just the type of conversation you should be having with your current lender or a mortgage professional.

5. Pay down your principal

You can save thousands of dollars in interest by making a few small changes that will help to pay down your principal faster.

By switching from monthly mortgage payments to bi-weekly rapid payments, you could save over $20,000 in mortgage interest and be mortgage free 3 years sooner (based on a $250,000 mortgage at 3.99% interest amortized over 25 years). If you can afford to pay a bit more each month on your mortgage ($110 per month in this case), the reward is long term cost savings.

Also consider making lump sum prepayments or double up one month on your payment. Many closed mortgages allow you to pay up to 10 per cent of your mortgage or to double up a payment annually. Prepayments are applied directly to the principal balance, which will save you money.

Don’t let this rate increase creep up on you. Mortgage rates are going up soon, but there’s still time for you to save if you act now.

Kelly
PR@RateSupermarket.ca

The Globe and Mail reported today that the Bank of Canada appears confident that the hot national housing market will slow down before a bubble forms. The housing market has been on the central bank and the Finance Minister’s radar over the past few months as the market just hit a record number of sales last month, as they are wary that a bubble may be forming. Jim Flaherty thought the situation was getting so serious he cautioned that the government could look at adding further mortgage market regulations to the mortgage market to try and slow down people taking on too much low interest debt and to slow down the housing market.

Today the Bank of Canada governor, Mark Carney said, “Following a period of vigorous growth, housing investment is projected to slow through 2010 as pent-up demand subsides and affordability declines”.

In the same statement the bank said they expect the Canadian economy to grow faster than expected from the 2nd quarter of this year through early 2011, and increased its forecast for the US. So it seems like the recession is behind us, and with Obama’s recent announcement that he wants to increase banking regulations so that the US can’t get into a situation again where taxpayers are held ransom by a bank that is “too big to fail”, let’s hope we don’t get into this type of a situation again.

Time will tell.

The Bank of Canada announced this morning that it is keeping the main interest rate, its target for the overnight rate at 0.25%. It also maintained its commitment to keep rates at their current levels until the end of Q2 2010, but again stated that the Bank retains considerable flexibility to change if inflation (or the housing market) gets out of hand.

In the announcement they said that the global economic recovery has started, mainly due to improving financial conditions and stronger demand domestic demand growth in many emerging-market economies. While the outlook for global growth through 2010 and 2011 is somewhat stronger than the Bank had projected in its October Monetary Policy Report, the recovery continues to depend on exceptional monetary and fiscal stimulus, as well as extraordinary measures taken to support financial systems.

Canada’s economy grew in Q3 2009 and is believed to have grown even more in Q4 2009, while total CPI inflation was positive in the last quarter, the core rate of inflation has been slightly higher than expected recently. Nonetheless, the Bank believes the economy was operating 3.25% below capacity in Q4 2009.

Canada’s economy is expected to return to full capacity, with 2% inflation, in Q3 2011, while the economy will grow:

Factors driving the recovery:

Factors creating a drag on economic activity:

These factors have shifted the balance to domestic demand growth and away from net exports.

No mention was made of the potential housing bubble that everyone is talking about after CREA’s latest report citing December 2009 as the highest month of housing sales on record.

Bank of Canada Governor Mark Carney spoke yesterday about the government’s current issues with household finances.

“The combination of sustained growth of household debt relative to income and a rising interest rate environment could increase the vulnerability of households to an adverse shock”, he said.

Low mortgage rates have enticed Canadian consumers to jump on the housing ban-wagon and take advantage of ‘cheap debt’. The government’s current monetary policy is to keep interest rates low until the middle of next year. This strategy was in part meant to stimulate consumer spending – the domestic market needed to offset the decrease in external demand due to a global recession.

And stimulate consumer spending it did. The Re/Max Housing Market Outlook Report confirmed that national residential housing sales are expected to top 465,000 units by year-end 2009, a 7% increase over last year; while housing values climb 5% to $318,000, up from $303,594 in 2008.

It’s hard to believe that all this activity took place during the worst recession since the Great Depression.

So is the government concerned that Canadians have overextended themselves? Is the housing bubble about to burst?

Personal bankruptcies in Canada rose 41% in the third quarter in comparison to the same period last year. Bankruptcy as a proportion of the population is at its highest level since 1991. Delinquency rates on loans have also increased, with the proportion of mortgages with payments in arrears three months or more up by 50% over the past year.

But despite these alarming numbers, Carney believes that the risks to the current Canadian housing sector are low. He warns consumers and financial institutions to be vigilante as we climb the latter to economic prosperity.

“It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts. Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit.”

Only time will tell if the government’s attempt to stimulate consumer spending has gone too far. When interest rates begin their climb, and they will, many consumers will be wondering if they’ve bitten off more debt than they can chew.

Kelly
PR@RateSupermarket.ca

The Governor of the Bank of Canada, Mark Carney, gave a speech in Toronto today regarding the Current Issues in Household Finances.

Here are some of the highlights:

Overview

1. Feedback between financial markets and the real economy has reversed direction

2. The inventory cycle has turned and housing sectors are stabilizing.

3. Considerable fiscal expansion and monetary stimulus are supporting domestic demand.

Canadian households

Households and Financial Stability in Canada

Stress Testing the Canadian Household Sector

As you can see in the table above the Bank’s stress test involves the major interest rate (the target for the overnight rate) rising as follows:

Scenario 1

1 year (Q4 2010) = + 1.25%
2 year (Q4 2011) = + 2.85%

Scenario 2

1 year (Q4 2010) = + 1.25%
2 year (Q4 2011) = + 3.75%

Conclusion

So in closing Mark Carney believes that we’ve help up through the storm, he isn’t too worried about a “housing bubble” and re-itereated the Bank’s conditional commitment to keep current interest rates low until Summer 2010 as long as inflation stays within 2%. We are enjoying a time of extremely low interest rates and households need to plan an increase of up to 3-4% over the next couple of years to ensure they don’t get into trouble.

Bank of Canada maintains overnight rate target at 0.25% and reiterates conditional commitment to hold current policy rate until the end of the second quarter of 2010

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

They cited the following reasons for this interest rate decision:

• While significant fragilities remain, global economic developments have been slightly more positive and the global outlook has improved modestly relative to the Bank’s projection in its October Monetary Policy Report (MPR).
• Expected demand is moving towards net aggregrate demand and away from net exports which in Q32009 resulted in weaker GDP growth
• Core inflation in recent months has been slightly higher than the Bank had projected, although total CPI inflation remains close to projections.
• The drivers and profile of the Canadian economy remain the same as the Bank’s MPR report in October 2009.
• They expect the growth and recovery to continue along with inflation to return to the 2% target in Q2 2011
• If outlook remains within the desired range then the target overnight rate can be expected to remain at its current levels until Q2 2010, although the Bank “retains considerable flexibility” – this is great news for variable rate mortgage holders and shoppers looking for variable rates as this means they shouldn’t increase until next summer. Also, as members of Mortgage Rate Outlook Panel highlighted, that further discounts to variable rates are to be expected.

Main risks to inflation are:

Upside:

Downside: