Tag Archive for overnight rate

Laurin Jeffrey | June 23, 2011
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Canadian Mortgage Rate Forecast

Over the past few months, major economists have backpeddled on their rate hike predictions.

Not long ago, the consensus of economists was projecting a July 19 increase. Now, those same analysts aren’t looking for a rate bump until this fall… or later.

A slew of factors justify a deferral of rate increases, including:

* A parade of weak economic data from the U.S. – our key trading partner
* Core inflation that remains manageable
* Global economic risks
* Debt-laden consumers that are only cautiously spending
* A U.S. housing market that’s double-dipping
* U.S. unemployment that may be structurally and permanently elevated
* A Canadian dollar that is still acting as a brake on our economy.

For reasons like these, TD Bank became the first major bank last week to predict the Bank of Canada would stand pat on rates through 2011. Depending on how the next rounds of economic data look, other banks may follow suit.

Then again, the rate picture can and does change.

BMO says: “…it is too soon to dismiss the possibility (of rate hikes in 2011).”

BoC chief Mark Carney recently said: “…The expectations, both in the medium term and sooner than the medium term, is that rates are not going to stay at these unusually low levels.”

Latest Overnight Rate Forecast

The Bank of Canada’s overnight target has a direct impact on variable mortgage rates.

Bank             2011     2012
BMO             1.50    2.75
CIBC             1.75     2.00
NBC             2.00     2.75
RBC             1.75     3.00
Scotia         1.50     2.25
TD                 1.00 2.00
Year-end Avg    1.50     2.50
Chg vs Today    +0.50    +1.50
(Figures above are year-end and rounded to the nearest 1/4 point increment.)

Latest 5-Year Government Bond Yield Forecast

Government bond yields drive 5-year fixed mortgage rates.

Bank             2011     2012
BMO             2.93     3.80
NBC             3.46     3.88
RBC             3.30     4.05
Scotia         2.85     3.35
TD                2.70 3.65
Year-end Avg     3.05     3.75
Chg vs Today     +0.89 +1.59
(CIBC’s 5-year bond forecast was not available.)

Caveats

The above projections should be qualified as follows:

1. With only four Bank of Canada policy meetings to go in 2011, some of the banks may soon defer or pare back on these rate increase estimates.

2. The Overnight index swap (OIS) market, which mirrors BoC rate expectations, tends to predict rate changes slightly better than economists. Currently, OIS prices are implying less than 50% probability of a rate hike this year. The next rate increase is not fully priced in until February 2012 (updated as of Friday’s close)! Just a few months ago, the OIS market believed rates would increase on July 19.

3. Long-term rate outlooks have margins of error as big as 1.00% or more, so use them only as a rough guide (more on this below).

Variable Rate Mortgage Forecast

Bank estimates, if accurate, imply a 4.50% prime rate by December 31, 2012. Prime rate is currently 3.00% and the 10-year average of prime is 4.33%.

Based on an 80-basis-point discount from prime, these forecasts suggest 5-year variable rates in the 3.70% range by year-end 2012. That’s slightly higher than today’s best 5-year fixed rates.

Fixed Rate Mortgage Forecast

The banks predict that 5-year bond yields will rise to 3.75% in 18 months. That level would eclipse the 10-year average of 3.61%.

Assuming a typical 125 basis point spread above yields, these forecasts imply that a deeply-discounted 5-year fixed rate mortgage could hit about 5.00% by year-end 2012.

Rate Forecasting In Perspective

The major banks spend millions to formulate accurate interest rate projections. Their economists utilize every data source, academic study, historical backtest, and analysis tool imaginable. Yet, try as they might, their forecasts are far from infallible.

Despite economists’ notorious and continuous forecast revisions, long-term rate estimates still provide a useful reference point. Part of their value is in showing what might happen if the world unfolds without global crises and major economic disruptions.

With that reference point as a “base case,” these forecasts can be useful for creating amortization models based on future rate assumptions. The key is to incorporate a reasonable margin of error in those models—one that’s big enough to account for things like hyper-growth/inflation or the aforementioned economic disruptions.

Other Things to Note

Bank forecasts, like those above, are subject to frequent change. This data is therefore provided only for general interest. Always discuss your needs and risk tolerance with a mortgage professional before acting on any such information.

History has shown that it’s near impossible to accurately predict interest rates long-term, so use these figures at your own risk. That said, while economist projections are often wrong, they remain one of the better sources of educated opinion on interest rates.

“Chg” = the expected change in rates from today. In other words, Chg is the average forecast minus today’s rates. All estimates above are based on the respective year-end, except those of BMO. BMO forecasts the average rates for a given quarter, instead of the rate at the end of that quarter. Because of that, we have averaged BMO’s Q4 and Q1 forecasts to estimate the year-end 2011 figure.

Bank estimates are taken from their latest forecasts published online. Overnight rate results are rounded to the nearest 1/4 point, in keeping with the Bank of Canada’s standard rate setting increments.

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Laurin Jeffrey | April 14, 2011
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Fixed-rate mortgages find few friends among brokers

Rob Carrick – Globe and Mail

How would you like to be a disinterested bystander during the coming run-up in borrowing costs?

Toronto-Dominion Bank’s new special offer of a seven-year mortgage at 4.79 per cent will do that for you. Or, you can buy yourself a decade’s worth of protection against interest fluctuations with a 10-year mortgage at 4.99 per cent.

I’ve been doing this job long enough to remember when those rates looked quite competitive. By today’s standards, they’re too high to get much support at all from a panel of six mortgage brokers I surveyed by e-mail on TD’s deal.

They’re big fans of variable-rate mortgages, which today can be had for as little as 2.15 to 2.30 per cent. You ride in the front car of the interest rate roller coaster with these mortgages, though. Every time the Bank of Canada sets its rate benchmark higher, borrowing costs on variable rate mortgages rise as well.

The risk of rising rates is hard to quantify right now because of global economic cross-currents such as soaring commodity prices, economic troubles in Europe, what’s happening in Japan and an improving but still damaged U.S. economy. Our economy is on the upswing, and yet the Bank of Canada remains tentative on rates. It bumped up its overnight rate three times last summer by 0.25 percentage points each and hasn’t made a move since.

The bank has six more opportunities to raise rates this year, starting on April 12. It’s tough to be sure whether rates will increase in the rest of 2011, but you can be dead certain that over the next seven years, they’ll rise to levels that are much higher than they are now.

Seven- and 10-year mortgages are an extreme, and thus infrequently used, way of insuring yourself against a higher rate world. A survey released late last year by the Canadian Association of Accredited Mortgage Professionals showed just 7 per cent of mortgage holders had terms of five to 10 years and 1 per cent had terms longer than 10 years.

The CAAMP survey also found that roughly two-thirds of people have fixed-rate mortgages, about 30 per cent have variable-rate mortgages and the rest have hybrids with variable and fixed components. Clearly, Canadians like the idea of interest rate security. But seven years of it? Not so much.

“We have a small number of customers going into the odd terms, which are two, four, seven and 10 years,” said Chris Wisniewski, associate vice-president of real estate secured lending at TD Canada Trust. “We haven’t seen a significant rise in the last little while, but there’s more and more concern about the potential for rising interest rates.”

Several of the mortgage brokers surveyed for this column were strongly in favour of variable mortgages as opposed to fixed-rate mortgages of any term. “In my many years of experience, going fixed generally has not worked out well for my clients,” wrote Peter Majthenyi of Mortgage Architects in Toronto.

Vancouver mortgage broker Kim Arnold said she currently can get a variable-rate mortgage for clients at prime minus 0.85 percentage points or 2.15 per cent. For people who want fixed rates, she can arrange a three-year term at 3.42 per cent or a five-year term at 3.79 per cent.

The most aggressive stance against the seven-year mortgage came from veteran mortgage broker Vince Gaetano of Monster Mortgage. “It’s an ill-advised idea [for the consumer] and money maker for TD Canada Trust,” he wrote in his survey response.

Mr. Gaetano said the extra cost of locking in for seven years isn’t worth it. His preferred approach for people who want a locked-in mortgage is to take a five-year term, but make payments as if the rate was the 4.79 per cent charged on the seven-year term.

“It is important that Canadian consumers understand the need to accelerate the repayment of their debt rather than worry about where rates are going,” he wrote.

One mortgage broker who offers some support for the seven-year mortgage is Jake Abramowicz, who works mainly with first-time buyers in Toronto. “I think it would be a good idea if someone taking a fixed [mortgage] would extend for longer,” he wrote. “Problem is, most of my first-time buyers don’t see themselves in their places for seven years. The great majority, being between 25 to 40 years old, want to keep moving up the property ladder.”

Seven- and 10-year mortgages may be fringe products, but they do get you thinking about where rates will go in the next several years. Some people will decide to pay a higher rate today so they can tune out whatever’s ahead, and who are we to fault them?

Variable rules

Two mortgage brokers give their takes on the down side of fixed-rate mortgages:

David Larock of Integrated Mortgage Planners: “I have long thought that the five-year fixed-rate mortgage was overrated because you’re paying a premium for interest-rate protection, yet not really getting as much as you think. For example, if you take a five-year fixed today, and rates stay low for 2½ years and then start taking off, you have paid for five years’ worth of protection and, in the end, you’re only really getting a benefit for half of that time period.”

John Cocomile of Greedy Mortgage: “In theory, rates are at historical lows and they will trend up to where they’ve been historically, but not for a long time. The mess in the U.S. is going to keep rates low for the next 18 months to two years, likely longer. Most people in longer-term fixed-rate mortgages end up paying a big penalty, anyway.”

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Laurin Jeffrey | March 13, 2011
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Fed keeps interest rate the same

Would they or wouldn’t they? This was the question on many Canadian lips for the last couple of weeks. There has been much talk that a rise in interest rates in inevitable. That may be so—but not today.

The Bank of Canada “is maintaining its target for the overnight rate at 1%. The Bank Rate is correspondingly 1 1/4% and the deposit rate is 3/4%.”

Despite all the buzz and speculation about interest rates, with reasonable Canadian economic growth, political turmoil in Libya and the price of oil, and a myriad of other factors, the Bank of Canada has held its status quo for interest rates, again.

This latest announcement marks the fourth consecutive time that Mark Carney has left rates unchanged; he is not without his reasons though.

The Global economy is moving along as expected, although “risks remain elevated’; perhaps most the most prominent flag in this regard is the storm that is churning in Libya- and the possible surge in oil prices; This gives Canadian investors and consumers alike an unwelcome taste of déjà-vu- from the pre-recession days—when oil prices were widely forecast to reach between $200-$300/ barrel.

That said, the Canadian economy is modestly beating growth forecasts; the US economy continues to chug along, put in sustained motion by government stimulus; similarly, businesses are continuing to spend, and are starting to contribute to overall economic growth, through investment partially funded by government stimulus.

In terms of inflation, Canadian inflation levels are moving reasonably, and are keeping in line with what is expected- “Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy. ” Global inflation continues to grow—but at a manageable pace.

“Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1%. This leaves considerable monetary stimulus in place, consistent with achieving the 2% inflation target in an environment of significant excess supply in Canada. Any further reduction in monetary policy stimulus would need to be carefully considered.”

The changes to mortgage lending introduced by Jim Flaherty earlier this winter are set to take affect this month; there has been widespread concern that the combination of tighter lending restrictions, shorter amortizations and higher rates, might cause stress to an already heavily debt burdened typical Canadian consumer. At least for now, they will get a reprieve from higher rates.

What will Carney’s next move be, and what will the implications be on Canadian borrowers and the economy alike? Let the speculation begin for the next rate announcement- which comes down on April 12.

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