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Mortgage Rate Outlook Panel

Our panel of mortgage experts share their views on Canadian mortgage rate trends each month by answering this question: What is your outlook for Canadian mortgage rates over the next 30-45 days?

February 2010 Overall Summary

The results of this month's mortgage rate outlook tell a divided story. 43% of panel members expect fixed mortgage rates to slightly decrease this month, while the same percent believe that fixed rates will stay where they are. Variable mortgage rates are expected to remain unchanged for the month.

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The mortgage market has seen a strong start to 2010 as consumers scramble to secure low rates before an expected interest rate hike in the second half of the year. As lenders fight for market share fixed rates could drop a few basis points over the coming weeks - but it will be short lived, so keep your eyes peeled.

Panel members who believe fixed rates are likely to remain unchanged cite a weak US dollar and stronger than expected figures for recent economic growth; hence, the slight decrease in bond yields over the past month are unlikely to be passed on by lenders.

The majority of our panel members (80%) still believe that variable mortgage rates will remain unchanged in the short term. The Bank of Canada has been quite clear about maintaining the current overnight rate in the first half of 2010, subject to inflation. Also, interest rate changes prior to the federal budget on March 4th are extremely unlikely. Although no decrease to the interest rate is expected, a few of our industry experts believe that lenders will boost discounts on prime, resulting in lower variable rates.

This Month's Panelists

Dan Eisner - President, True North Mortgage

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The feeble US dollar will continue to limit the Bank of Canada's ability to mess around with the prime rate for a long time to come; and the bond traders know it. Hence rates will stay where they are for the next 2 months.

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George Hugh - President, Taurus Mortgage Capital

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Though we are still a few months away from the official start of spring, when it comes to mortgages, spring has arrived! What does this mean? Rates will most likely trend down slightly as lenders race to originate volumes given the uncertainty of the mortgage market predicted for the second half of the year. Just when you thought fixed rates couldn't go any lower? A word of caution, good things don't last forever!

With the threat of increasing interest rates over the next year 12 to 18 months, many banks are in favour of placing their clients into VRM mortgages with the hope of locking them into a higher fixed rate in the future. As a result, you can expect to see VRM rates below 2.00%

Elisseos Iriotakis - President, Safebridge Financial

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The best indication as to where fixed rates will be heading is to look at the Government of Canada Bond yields. Since approx. 80% of consumer ask about the 5 year fixed term, let's look at the 5 year bond.

As of December 31st 2009 the bond hit a high of 2.77%. At that time the corresponding 5 year fixed rate, with most lenders was at 3.99%. Fast forward to February 1st and the 5 year bond has dropped to 2.47%. That's a drop of 0.30%. Will we see all banks drop their rate by .30%. Probably not. However, all it takes is for one of them to start this trend and the rest usually follow. My prediction is that the 5 year rate will drop in the coming weeks.

In regards to the variable rate, there won't be any Bank of Canada increase in the next few months. I am also a believer that if the employment situation doesn't improve and if Government stimulus also stops, then the Bank of Canada can't afford to raise rates anytime soon....likely not until 2011.

Gregory Klump - Chief Economist, CREA

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As the Bank of Canada indicated in its Monetary Policy Report published last month, "The recovery continues to depend on exceptional monetary and fiscal stimulus." Notwithstanding stronger than expected figures for recent economic growth which pushed up yields in the bond market, expect fixed mortgage rates to remain on hold over the next month. A string of strengthening economic indicators will be required before bond yields rise to the point where they start pushing up fixed mortgage interest rates.

Late last month, the Bank of Canada again repeated its commitment to keep its trend-setting overnight lending rate on hold until the second half of 2010, conditional on the inflation outlook. Accordingly, variable mortgage rates will remain unchanged over the next month.

Dr. Ian Lee - Program Director, Carleton University

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Fixed mortgage rates are heavily influenced by bond yields. Bond rates are essentially stable and the present short term dip will not likely be passed on by the banks, as they rebuild their capital, due to the credit losses occasioned by this recession. Moreover, due to the highly concentrated nature of Canadian banking, the six banks watch each other and the feds very closely, as each understand the impact - and thus scrutiny - each receive concerning any decisions by any of them e.g. increases in mortgage rates.

Consequently, Canadian banks are very sensitive politically and they will not rain on Finance Minister Flaherty's party prior to March 4 Budget Day.

VRM rates are driven by the Bank of Canada rate. It would be unconscionable (and unacceptable politically) for the Bank of Canada to announce a change in rates just before the annual federal budget in early March. Moreover, as Governor Carney noted in the MPR, the economy recovery is fragile with much of the growth due to monetary and fiscal stimulus. Hence, no need for an increase.

Rob Mclister - Editor, Canadian Mortgage Trends

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Fixed mortgage rates are driven by bond yields, which studies show are near impossible to predict over the short-term. For that reason, my forecast is as good as the guy down the street.

While successful mortgage strategies are based more on contingency planning and risk tolerance, if I had to position $1 million in bonds today (February 2), my logic would be this: 5-year yields have been in a trading range for eight months, with 2.35% to 2.40% acting as support. With yields currently near the bottom of their trading range, and given last week's blockbuster GDP figures, the path of least resistance through March 2 appears up.

Prime rate won't drop but discounts to prime will get juicier. Don't expect anything to celebrate over, but variable-rate discounts should widen slightly from today's typical prime - 0.15%. An average of prime - 0.25% appears doable in 30 days, and some brokers will likely advertise 10-20 basis points below this number.

Garth Turner - Author, Former MP

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Slightly lower rates are possible, but far from certain over the next month.

Explanation: The bond market is where long-term rates are set, and these days those markets are carefully weighing huge appetites for government borrowing, and trying to assess the interventionist role of central banks in Canada and the US. Any changes will be minimal, but expect more volatile as the year ages.

There is a federal budget March 4th. The governor of the Bank of Canada would rather date Lady Gaga than make any changes to the overnight rate prior to then.