September 7, 2010

Homeowners aren’t likely to face higher mortgage costs for at least the next month and some banks may even follow the Bank of Montreal in cutting new fixed-rate loans to compete for a dwindling number of buyers, specialists said.

According to a panel of mortgage experts polled both fixed-rate and floating rate mortgages will remain unchanged for the next 30 to 45 days.

The sharper-than-expected slowdown in the Canadian economy, which grew at 2% in the second quarter, coupled with a barrage of negative data from the U.S., has increased the likelihood that Bank of Canada governor Mark Carney will pause in his interest rate tightening cycle in September.

Before Tuesday’s gross domestic product numbers, most economists had expected one more increase before rates went on hold.

“Two weeks ago I would have said an increase of 0.25% for sure but with the recent weakening in the economy, governor Carney may be best to sit pat,” said Elisseos Iriotakis, president of Safebridge Financial.

On the fixed-rate side the trend may still be towards further cuts.

The Bank of Montreal on Wednesday said it was offering a special 3.59% rate on a five-year fixed mortgage, down from 3.79%. It was the 12th consecutive fixed-rate cut since April.

Banks typically fund their fixed-rate mortgage lending from instruments tied to bond yields. The ongoing rally in the fixed-income market has meant they are able to continue to offer lower rates, even though the Bank of Canada has raised its prime rate twice since June.

“Deflation worries and risk aversion are holding yields down in the bond market,” panel member Larry MacDonald, an economist and author said.

Banks are also chasing fewer buyers, with housing sales dropping 6.8% in July from the previous month and 30% from the previous year, according to the latest statistics from the Canadian Real Estate Association.

That said, the other Big Five banks may not be as keen as BMO to shave rates to the bone.

“Big banks are not fond of overt rate competition,” Robert McLister, editor of leading mortgage news publication Canadian Mortgage Trends said in an e-mail. “Unless bankers dramatically alter their business models, a public rate battle among the Big 5 is unlikely.”

More likely is some kind of selective discounting, McLister said. That may entail giving their sales force greater discretion in offering special rates to clients.

“TD, RBC and BMO have each taken a stab at no-haggle pricing in the past, but only for a limited time,” he said. “As soon as margins compressed or their market share objectives were met they quickly went back to the tried and true.”

McLister said BMO may be pushing to win back market share, which slipped to 9.3% in the third quarter from 9.8% the same period last year, according to the banks quarterly presentation slides.

Sharon Singleton, Toronto Sun

September 2, 2010

The odds are fair that prime rate is heading 25 basis points higher in one of the next two Bank of Canada meetings. (See this Reuters’ poll)

After that increase, many analysts foresee a pause of at least six months before rates resume higher. Rates are then expected to climb modestly until prime rate gets closer to its 4.65% ten-year average.

This scenario has some people thinking that a variable rate is just what the doctor ordered. If you happen to be in that boat, there’s an even better strategy to consider.

If you do a little digging you’ll find various brokers offering 1-year fixed rates near 2.25%.  These offers are a fantastic alternative to variables, for a few simple reasons:

1. If the BoC hikes rates 1/4% in the next few months, your 2.25% one-year fixed will be equivalent to a prime – 0.75% variable.  (Prime – 0.75% is presently an extremely good rate for a variable.)
2. A 1-year fixed gives you total protection against further rate increases for one whole year. If the BoC hikes again within 12 months (very possible), you’ll instantly save money over a deep-discount variable.
3. Renewing in one year affords the opportunity to switch into a variable at a potentially better discount than you can get today. (There’s no guarantee, but the chances are pretty good.) That switch can be free of charge depending on the mortgage type, lender and/or the broker you’re dealing with.

So, if you’re hunting for a variable, play the odds and have a peek at today’s 1-year fixed terms instead. Your mortgage planner can provide complete details on either option.

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Common Sense Reminder: Rate predictions are subject to change due to random events. Take the above analyst forecasts for what they’re worth. One-year terms are not suitable for everyone.

canadianmortgagetrends.com