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.

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

RBC released its Canadian Consumer Outlook Index today which reported that despite continuing reports stating the economy is recovering quickly, Canadians are worried about their debt levels and are anxious about their jobs.

The Bank of Canada reported last week that consumer credit held by the big banks rose in December 2009 to $336B amount of consumer credit held by the country’s chartered banks rose to $335.6-billion in December, up $2B from the previous month and 15% over the previous year. It really has been an odd few years with the global economic crisis bringing down Lehman Brothers, bank bailouts around the world and it was the first recession in which real credit (or the level of debt people are taking on adjusted for inflation) has gone up.

The survey said that 58% of Canadians are concerned about their current level of debt. And when people are worried about having taken on too much debt, the last thing they need is to lose their jobs, and the survey also found that 26% say a member of their household is worried about losing their job or being laid off, which jumped up from 21% the previous month. Job security concerns were up in all provinces with the highest reported in BC (32%) and Alberta (31%).

Conversely, 45% of Canadians expect that their personal financial situation will improve over the next year, and 68% believe that interest rates will increased in the next 6 months while 28% believe they’ll remain the same.

Canadian Imperial Bank of Commerce chief economist Benjamin Tal commented that it looks like many people are over their head in debt and will be in trouble when interest rates rise. With rates at near all time, especially mortgage rates it has brought demand for big ticket items such as houses forward, meaning people looking to buy a house in the next year are rushing to get into the market now, and this will reduce activity in 2011.

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.

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.

Another article in the Toronto Star’s series on credit cards covered what the outrageous interest rates being charged actually cover:

The Canadian Bankers Association says there is no direct relation between the Bank of Canada’s key interest rate, which influences the commercial banks’ prime rates, and consumer rates on credit cards.

In fact, the Bank of Canada rate represents less than 1 per cent of banks’ overall funding costs, it says.

Many factors go into setting credit-card interest rates, including:

“Credit-card interest rates tend to be higher than other loans because there is no collateral involved so there is a higher risk for the issuer,” the association says.

Its president and chief executive officer, Nancy Hughes Anthony, also stresses that the vast majority of Canadians pay no interest at all.”They pay zero because … 70 per cent of Canadian households regularly pay off their credit card balances in full every month,” she said.

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:

The Bank of Canada seems to be sticking to their plan of keeping interest rates low until June 2010. Which is a good indication that the variable mortgage rates will remain low. While this sounds promising to homeowners who are buying and/or selling within the next seven months, many of us are wondering what’s going to happen with interest rates after this date? And as we’re trying to predict what the rates will be like, Ontario and B.C. are conveniently going to be paying extra taxes when the Harmonized Sales Tax (HST) comes into effect July 1, 2010.

So potentially higher interest rates and additional taxes are on the horizon – sounds like a double whammy right? You see, the additional tax is going to affect everything we currently don’t pay PST on: groceries, haircuts, clothes, etc. This also includes most of the home purchasing closing costs such as lawyer fees, home inspections and real estate commissions. To top it off, the current 5% GST we pay on new homes will now increase by 7 – 8%. Homeownership is going to get a little more expensive come July 2010.

So what exactly is the HST and how will it affect the provinces of Ontario and BC?

The HST is a sales tax that combines both the PST with the GST. In Ontario, this tax will be 8% PST + 5% GST equalling a new 13% HST. In BC, this will mean adding up the existing 7% PST + 5% GST resulting in 12% HST. When the new tax becomes effective, GST/PST will be completely eliminated and everything will instead require HST, minus certain exempt items that can be found on the Revenue Canada website.

While the HST will take effect in BC and Ontario on the same day, key differences exist between how the tax was introduced and the rebates each province will receive.

In Ontario, Dalton McGuinty introduced the HST in January 2009. Despite negative reactions, it was announced in March 2009 that the HST would take effect in July 2010. When this tax was introduced, the public was also promised a family rebate to “offset” some of the tax burden. Rebates introduced to counter balance the effect of the sales tax totals $1,000 for families with an income below $160,000 and $30 for singles with an income below $80,000.

While Ontario has been preparing for the July 2010 transition to HST since March, BC didn’t make this announcement until this past July. The announcement came as a complete shock to businesses and residents. There was no warning or consultation and no family or individual rebate offered.

How will the HST affect real estate

Regardless of when it was announced, both provinces will face increased taxes. Resale homes will be exempt but new home sales will be affected. However, in both cases, the services required to run a home and sell a home such as utilities, real estate commissions, home inspections and legal fees will increase by 8% or 7% (depending on the province you live in).

For new home sales, according to the Ontario Real Estate Association, the HST will add $1,747 to $2,297 to a home costing less than $400,000. Here is a breakdown of the typical increases we’ll see in both Ontario and BC:

To help ease the burden, both the Ontario and the BC governments have promised rebates for all home buyers purchasing new homes regardless of the price of the house (resale homes don’t qualify).

Rebates up to $24,000 are promised on the first $400,000 of the purchase price. This rebate is also extended to new residential rental properties.

Yes, all new homes, regardless of their price, are going to be seeing a maximum rebate of $24,000. However, the price for a new home will increase by 8% in Ontario and 7% in BC. Meaning, a $400,000 house will still increase by approximately $8,000 after the rebate, plus you’ll have to pay the additional taxes on top of the closing costs.

Other areas being affected by HST

Residential landlords will see an increase in the costs to house tenants. Items required to operate a building such as maintenance, electricity, plumbing, etc., will now be subject to the additional tax. Landlords may be forced to increase rent as a result.

The home construction industry is also expected to suffer. All new homes are subject to the combined tax and builders are worried this will cause the market to collapse when it was just getting back up to speed, even with the promised rebate. The past few months have been seeing extremely high rates of housing starts, rising to the highest levels in March. Starts were up to 55,700 in October (up 14.8% from September) in BC and up 13% in Toronto reaching 34,200 in October.

While builders have seen a promising recovery in their industry over the past few months, they’re now worried consumers will once again crawl back into hiding after July. Therefore, many are working overtime to get projects done before the deadline.

The HST is arriving at a time when we’ll still be recovering from the hard-hit recession. Yes consumer confidence in the real estate market has increased but this has been a result of lower prices and record-low interest rates. Now with the new tax coming at a time when interest rates are predicted to go up, new home sales and starts may once again stagnate.

The real estate market experienced a depressing winter last year, with real estate agents and lawyers losing out on a lot of money. While this winter looks more promising, lawyers, agents and builders will have to work to maintain consumer confidence into the summer; whether this is through discounts, packaged deals or attractive home prices. If you’re thinking about purchasing a new home, you may want to look into it now so you’re not caught in the potential crossfire between hiked interest rates and added tax.

Caroline
PR@RateSupermarket.ca