Canada's mortgage rates on the way down
Canada's mortgage rates are heading down. At a time when stock markets are volatile and with the economy and income growth slowing, the positive news for those planning to get into the housing market or whose loans are up for renewal is that it's going to cost less to finance a mortgage.
Economists, who are on top of the eddies that influence the borrowing and lending of money, and mortgage brokers, who tap funds for buyers, all agree that in the months ahead it's going to be cheaper to borrow. What they don't agree on is where rates will bottom out.
All the forecasts point to the Bank of Canada reducing its key overnight lending rate currently at 3.5 per cent. Chartered banks use the rate as a guide for their own prime rate that, in turn, dictates the cost of borrowing to consumers.
The 12-month outlook for the central bank's overnight lending rate suggests it will flatten out between 2.5 per cent and three per cent.
If the banks follow the Bank of Canada down with its rate-cutting policy, consumers could see the posted five-year fixed rate, currently at 7.29 per cent, drop to about 6.3 per cent, and mortgage brokers offer around five per cent. Variable rates would be under five per cent.
Consumers should not be misled by the posted rate. While it was at 7.29 per cent, banks were readily offering 5.9 per cent to their customers.
Current rates are higher than they should be, said Daniel Martel, president of G. R. Gauthier Financial Services Inc. In mid-March, his Ottawa-based company's five-year rate was 5.39 per cent, but Martel felt that it should be around 4.6 per cent, based on the government bond market prior to the collapse in the subprime mortgage industry when banks sought a 1.2-point cushion. He blamed the high rate on banks' desire to recover their losses in the subprime market and to appease shareholders.
"The banks claim the rates are higher than they should be because their cost of borrowing is higher, which I don't agree with. I think it's more the banks recouping their losses," he said.
Every percentage point makes a difference. One percentage point on a $100,000 mortgage with a five-year term, amortized over 25 years, costs $62 more per month ($744 a year).
A homeowner with a $250,000 mortgage with a rate of six per cent pays $155 more a month ($1,860 a year) than his neighbour who has a rate of five per cent.
Many factors influence the course of rates and not all of them are homegrown. One of the biggest influences lies south of the border with the powerful Federal Reserve Board, which dictates the direction of U.S. interest rates.
The U.S. economy, left reeling by subprime mortgage defaults, tightening credit and a falling dollar, is getting bleaker. It is seeking to revitalize its economy and ward off the effects of a recession by continuing to cut rates. Because of the spillover effect from a weaker U.S economy, the Bank of Canada has little choice but to stay in step with U.S. monetary policy.
CIBC's Jeff Rubin believes the bank will gradually reduce its rate to three per cent as it follows the U.S. Federal Reserve downward. "While the Bank of Canada may not match the Federal Reserve Board basis-point for basis-point, it will, nevertheless, be following the Fed in direction," he said.
David Rosenberg at Merrill Lynch in New York forecasts that the Fed needs to get its Fed Fund rate down to one per cent.
"This may sound aggressive but Fed easing cycles in recessions almost always see the prior tightening cycle completely unwind. The serious nature of the current housing deflation and credit crunch environment makes the case for an aggressive easing in policy all the more compelling," he said.
The Bank of Canada's next opportunity to adjust its overnight lending rate is on April 22. On April 30, the Federal Reserve Board has the opportunity to do the same. Those are two dates to watch.
Keith Woolhouse