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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?

June 2010 Overall Summary

Uncertainty is the key word in this month's Mortgage Rate Outlook as there are a number of external factors, both domestic and international, that have our panel members divided on the short term outlook for fixed mortgage rates. They believe variable mortgage rates are expected to increase further, provided there is no additional surprise news from Europe.

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A variety of influential factors on fixed mortgage rates including strong demand for mortgages by the Canadian big banks, economic uncertainty in Europe, a slow down in consumer spending, and domestic inflation remaining within a tight band were cited by our panel members as the main driver for fixed mortgage rates this month.

This resulted in a split decision with the common thread that uncertainly within the international markets is justification for a sit and wait approach. The picture should become clearer when the Bank of Canada releases its next Monetary Policy Report on July 22nd.

The Bank of Canada announced an increase to the target for the overnight lending rate on June 1st. The debate now is whether this is the start of a continuous and steady incline, which was considered a given only a few weeks ago, or will the Bank of Canada wait to see what happens internationally before making another move.

The majority of our panel members believe we will see another 0.25% increase in July. However, it really depends on how the European economic issues play out. Domestically we may need a rate hike, but internationally the fear of a double dip recession is still prevalent.

Video Summary - June 2010

This Month's Panelists

Dan Eisner - President, True North Mortgage

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In the past 2 months the 5 year fixed rate was as high as 4.5% when the 5 year Canadian Bond yield hit 3.2% (a spread of 130 basis points). The 5 year bond yield is now around 2.7%, but the 5 year fixed rate has only dropped to about 4.3% (a spread of 160 basis point). The fixed rates have some room to move downwards, but lenders don't seem to be competing as aggressively as they were during the 1st quarter. Therefore there is some room for fixed rates to adjust down but we need the lenders to decrease their profit margin for this to occur.

The most important factor in determining what the variable rate will be in 30 - 45 days is the July 20th Bank of Canada announcement. The tone of Mark Carney's announcement this past Monday suggests the Bank of Canada does not plan on making dramatic rate increases in the coming months. Therefore we will either see another 25 basis point increase, or no increase at all. While prime starts to inch up, the relationship to prime continues to slide down. The discount to Prime has gone from Prime - 0 in June of 2009 to Prime - 0.6% today. The discount will likely continue to slide until it is in the -0.75% to -1.0% range. Therefore if the Bank of Canada holds prime steady in July then the variable rate will likely be a little bit lower then it is today.

George Hugh - President, Taurus Mortgage Capital

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The financial markets seem to be calming down, probably because it is getting better and better at dealing with the various market disruptions that the global economy has to throw at it!

(5 year fixed mortgage) rates are probably going to trend down further to around the 4.20% to 4.30% range (currently 4.49% for ING DIRECT). I do not believe that the latest drops are due to the market conditions, but driven by the strong demand for mortgages by the big bankers of the world.

Keep in mind that we are still very much in an increasing interest rate environment; my recommendation is that you take advantage of these lower fixed rates because they won't be around forever.

The interest rate gap between the 5 year fixed and 5 year variable rate mortgage (VRM) rates narrowed with the latest Bank of Canada move and will continue to do so for the remainder of the year. As the spread differential continues to narrow, the big decision for borrowers will be whether to go fixed or variable.

Elisseos Iriotakis - President, Safebridge Financial

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With the economic uncertainty in Europe, along with a recent report that Chinese manufacturing slowed in May and the fact that domestic inflation is still within a tight band, there are no real signs that long term fixed rates will rise in the next 30 to 45 days.

The Bank of Canada will likely increase the overnight rate by another 25 bps in July, but they will be closely watching global development and won't hesitate to stay pat if a slow down occurs. They will be monitoring the movement of the U.S. dollar as well since the U.S. isn't expected to increase their overnight rates until mid 2011. Governor Carney needs to keep in mind that if he increases the short term rates too quickly here in Canada, this will definitely bring the Canadian dollar back to parity and possible above. At the end of the day, domestically we may need a rate hike, but internationally there are too many unknowns which warrant a wait and see approach.

Gregory Klump - Chief Economist, CREA

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The five year conventional mortgage rate is unlikely to react much to the recent decision by the Bank of Canada to raise its trend-setting overnight lending rate by a quarter of a percentage point.

When announcing the increase in the overnight lending rate hike on June 1st, the Bank emphasized a number of downside risks to Canadian economic growth, including an expected easing in the rate of growth for consumer spending. I expect the five year mortgage rate to remain at its current level until at least July 22nd, when the Bank releases its next Monetary Policy Report.

In its June 1st announcement to raise its trend-setting overnight lending rate by a quarter of a percentage point, the Bank downplayed slightly stronger than expected inflation and economic growth of late. The Bank also signalled it was leaving its options open as to whether it will raise rates again on July 20th. I expect it will raise rates by another quarter of a percentage point at that time, but pause at some point later this year.

Dr. Ian Lee - Program Director, Carleton University

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Housing demand and thus mortgage demand is slowing down, partly because of the high ratio mortgage policy changes announced by Flaherty and partly because demand and supply are coming into balance due to the past several months of aggressive activity.

The latest job numbers from the US are terrible while the Canadian seems to be slowing down and Europe is stalled with over 10% unemployment. There is increasing discussion of a double dip recession and some economists are suggesting it looks like 1932. In this environment, the Bank of Canada will not raise rates this month.

Rob Mclister - Editor, Canadian Mortgage Trends

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As mortgage planners, we're not in the rate prediction business. The reason is simple: The impact of random events always makes rate forecasting a dice roll. Case in point is the recent European debt turmoil and its unforeseen 70 basis point slashing of 5-year bond yields. It's always better to prepare (for all possible scenarios) than to predict.

That said, we frequently aggregate economic viewpoints from reputable sources and boil them down into bite-size morsels for our clients. As of today, that consensus suggests that Canada's vigorous economic recovery should persist, inflation concerns should again take centre stage, and the path of least resistance for bond yields will be up. That is all barring the unexpected, and Europe remains a wildcard.

Don't be surprised, however, if fixed rates drop slightly in the short-term before reverting higher. Healthy profit spreads allow further discounting today while rising yields should drive up rates as the weeks unfold.

There is no indication that profit spreads will fatten enough in the next 30-45 days to inspire further widespread variable-rate discounting. We may see a 5-10 basis point change but, overall, variables should remain roughly 50-60 basis points below prime until the Bank of Canada's July 20 rate meeting.

Garth Turner - Author, Former MP

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Any change will be to the upside, despite Euro deflation. After all, the housing market is choking and the last thing banks need is be caught offside.

Mark Carney has spoken, sorta. After the quarter point toe-in-the-water, he'll pass on the July 20 setting. No change.