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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?

May 2010 Overall Summary

Fixed mortgage rates have risen quickly over the past month. However, given the recent drop in Government of Canada bond yields (the main influence on fixed mortgage rates) the Panel believes fixed rates will stay at current levels in the short term.

Variable mortgage rates will go up, but the question is when. An increase in interest rates will result in higher variable mortgage rates. The debate is whether or not the Bank of Canada will announce an interest rate increase following their meeting on June 1 or hold out until July 20. The Panel is split on the timing of the increase; however, 3/5 or 60% believe variable rates will begin their rise on June 1, 2010.

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Fixed mortgage rates increased quickly last month, with the benchmark posted 5 year fixed mortgage rate up by 1%. The Panel believes fixed mortgage rates are done climbing in the short term. Further increases are not in the cards this month as bond yields have dipped and concern is growing over Greece's debt crisis and its impact on the global financial markets.

The Bank of Canada removed their conditional commitment to keep interest rates at all time lows until July, opening the door to speculation on whether interest rates will begin increasing in June or July. Economic indicators to be published later this month will help determine the Bank's decision.

The majority of the Panel members believe variable mortgage rates will start their accent in June rather than July.

Video Summary - May 2010

This Month's Panelists

Dan Eisner - President, True North Mortgage

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The mortgage rate rocket ship has reached orbit. Rates are done climbing for the next 45 days.

Be aware. Prime will go up 0.5% in June or July.

George Hugh - President, Taurus Mortgage Capital

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Financial concerns in the European markets, mainly Greece for the time being, have began to impact the global financial markets in a way that has yet to be seen. The stock markets are showing concern, and with the media taking every chance to talk about these concerns, the fear is that this will begin to play on consumer confidence?

The result has been that 5 year bond yields have dropped 30 bps over the past couple of days. This trend is not expected to continue, with the consensus that we are in an increasing interest rate environment. With 5 year fixed rates in the 4.64% range, I would expect these to drop over the next 30 to 45 days, just in time to offset potential concerns of a slowing mortgage market in the 2nd half of the year?

The interest rate gap between the 5 year fixed and 5 year VRM rates remain huge (4.59% vs 1.75%). With growing credit concerns in Europe, the spread earned on VRM will begin to tighten. I would not expect lower pricing on VRM product over the short run.

Gregory Klump - Chief Economist, CREA

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The bond market expects a series of increases in the Bank of Canada's overnight lending rate. Unless economic indicators published in May come in stronger than expected, the bond market is unlikely to price in interest rate hikes beyond what its already expecting. I don't think the Bank of Canada will raise rates before July, so my guess is that bond and mortgage interest rates are unlikely to rise further until then.

In its April interest rate announcement, the Bank of Canada groomed financial markets for a possible increase in the overnight lending rate by dropping its commitment to keep it on hold until the second half of the year. Financial markets reacted by raising bets that the Bank would raise intererst rates in June.

Recent remarks from Bank Governor Mark Carney have financial markets second-guessing whether the Bank might wait until July. Economic indicators published during May will determine whether the Bank waits until July before raising rates. Job growth and inflation will have to come in stronger than expected for the Bank to raise rates in June. My guess is they won't.

Dr. Ian Lee - Program Director, Carleton University

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Governor Carney in his testimony last week before the Senate Committee on Banking stated, "We see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance."

Much of the heightened activity in the last 6 months in the Canadian real estate market was due to buyers moving forward their purchase decision to access the very low interest rates before these rates increased and after the announcement of Finance Minister Flaherty's to tighten mortgage rules, buying interests increased even more to escape these new restrictive rules effective April 1, 2010. For these reasons, we will see a cooling in demand which will reduce demand for mortgage funding.

Expect the Bank of Canada to increase the overnight lending rate on June 1, 2010 from 0.25% by 0.25% to 0.5% increase.

Last month, the Bank of Canada (BoC) dropped its commitment to no interest rate increases before July 1, 2010. Moreover, the BoC increased its forecast growth rate for Canadian GDP to 3.7%. According to the Bank of Canada, core inflation is bumping up against the 2% inflation target set by the Bank of Canada, which should trigger a prime rate increase.

Moreover, there is increasing concern amongst central bankers and finance ministry officials that the extraordinarily low interest rate environment encourage less than optimal behaviour by both consumers and governments (think Europe) in taking on higher levels of indebtedness, which may not be unsustainable if interest moves move up significantly.

Garth Turner - Author, Former MP

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While Greece burns, the risks of default and more downgrades in Europe grow, causing speculation of a credit crisis and an escalation in bond rates. This is a volatile situation in which I expect pressure for upward movement in the market, and fixed-rate mortgages. However, Canadian banks will try to resist this, lest the real estate market croaks entirely. So, no change this time. Watch out after that.

Short term: No change until Tuesday June 1st, when the Bank of Canada starts doing its striptease and raises the overnight by a quarter point. This will start a long Stairway to Heaven ascent taking the central bank benchmarker up a quarter point repeatedly for the next two years. If you have a VRM, pay attention.