Overnight lending rate remains the same

The Bank of Canada chose not to raise interest rates this morning which is a positive.
They feel right now we're cruising along nicely. I've attached the article written by the Bank this morning. The next meeting is December 4th.

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 3/4 per cent.
Against a backdrop of robust global economic expansion and strong commodity prices, information received since the July Monetary Policy Report Update (MPRU) indicates that the Canadian economy is now operating further above its production potential than had been previously expected. The core rate of inflation, which has been above 2 per cent for the past year, was 2.2 per cent in August. Total consumer price inflation fell temporarily in August to 1.7 per cent, having been above the 2 per cent inflation target since the spring.
Since the July MPRU, the outlook for the U.S. economy has weakened because of greater-than-expected slowing in the housing sector. The Bank has revised down its projection for U.S. growth to 1.9 per cent in 2007 and 2.1 per cent in 2008. U.S. growth is expected to pick up to 3 per cent in 2009.
The Canadian dollar traded in a range of 93 to 95.5 cents U.S. in July and August, but since then it has appreciated sharply to as high as 1.03 dollars U.S. In the Bank's new base-case projection, the Canadian dollar is assumed to average 98 cents, the mid-point of the range since the July MPRU. As well, there has been a tightening of credit conditions stemming from the financial market developments this summer. For Canada, the Bank assumes that the cost of credit for firms and households relative to the overnight rate will be 25 basis points higher over the projection period than it was prior to the summer developments.
Despite these tighter credit conditions, momentum in domestic demand in Canada is expected to remain strong. The combined effect of a weaker U.S. outlook and a higher assumed level of the Canadian dollar implies, however, that net exports will exert a more significant drag on the economy in 2008 and 2009 than previously expected. As a result, the Canadian economy is projected to grow by 2.6 per cent in 2007, 2.3 per cent in 2008, and 2.5 per cent in 2009. This growth profile implies that aggregate supply and demand will move back into balance in early 2009. Both core and total CPI inflation are projected to return to 2 per cent in the second half of 2008.
In line with this projection, the Bank judges, at this time, that the current level of the target for the overnight rate is consistent with achieving the inflation target over the medium term.
There are significant upside and downside risks to the Bank's inflation projection. On the upside, excess demand in the Canadian economy could persist longer than projected. This could come from two sources: higher growth in household spending than projected and lower growth in productivity than assumed. On the downside, if the Canadian dollar exchange rate were to persist above the 98 cent U.S. level assumed over the projection horizon for reasons not associated with stronger-than-projected demand for Canadian products, Canadian output and inflation would be lower. In addition, the effect of the past appreciation of the Canadian dollar on demand and inflation could be stronger than expected and the effect of the weakness in the U.S. housing sector could be greater than anticipated. All factors considered, the Bank judges that the risks to its inflation projection are roughly balanced, with perhaps a slight tilt to the downside.

Discounts off of Prime. (Variable rate mortgages)

In layman’s terms, what is happening?

Adjustable Rate Mortgages are typically priced according to the current 30-day Banker Acceptances (BA), which are a very common short-term money market investment, guaranteed by the banks. A lender funding adjustable/variable rate mortgages would typically borrow money through a 30-day Banker’s Acceptance. The lender is then responsible for paying the yield (rate of return) to the investor who purchased the BA. This yield is the cost of funding mortgages (“Cost of Funds”) to the lender.

So, what’s happening to the BA yields?

This is where the story has become interesting over the past few months.
The failure of the U.S. subprime market worried money-market investors. In Canada, investors began to sell off investments creating a strain on the market. Those who remained demanded higher yields from the BA market as no one was sure as to how much of these BA’s were used to finance U.S. subprime mortgages, or subprime mortgages here in Canada or other risky ventures. Everyone was asking the same thing: What’s the risk exposure? A classic example of the market overreacting.

The resulting increase in BA yields increased the cost of funds for lenders who want to finance their Adjustable Rate Mortgages. Essentially it’s costing lenders much more money now to finance ARMs than it did 60 days ago.

The following is a comparison of 30-day Banker’s Acceptance yields over the past 60 days:

July 17, 2007: 4.54%
August 3, 2007: 4.60%
August 14, 2007: 4.75%
August 17, 2007: 4.92%
September 11, 2007: 4.98%
September 17, 2007: 5.04%

*Source: Bank of Canada (www.bank-banque-canada.ca)

So, in 60 days we’ve seen the yield on 30 day BA increase 50 bps.

Now consider the interest rate earned by the lenders on an ARM at Prime - .90%. Today that interest rate is 5.35%. When you compare this to the current Cost of Funds at 5.04%, which doesn’t include overhead, profit margin (or any origination fees paid to mortgage originators), one can see that it’s only a matter of time before prices for ARMs need to change.

How long will this continue?

Are we seeing the end of the days of Prime - .90%? Perhaps for a while, until the money markets settle down.
The silver lining in all this is that due to Canada’s continued economic expansion and the reality of an $80+ barrel of oil, our longer term bonds are in high demand. As a result, we might see some interest rate decreases on the fixed rate products.

Overnight lending rate (prime)

Great news from the Bank of Canada today: No interest rate hikes.

The overnight lending rate (prime) will stay the same.

After watching the economic report this morning I feel safe to say that due to the crisis in the states, and the federal reserve in need of cuts, Canada may just follow, even though our economy is doing quite well. Time will tell. The credit crunch that is going on right now is making the Bank of Canada keep things where they are. The worse it becomes in the US makes it a better for us.

The next meeting will be October 18th.


What the Bank of Canada said this morning:

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 4 1/2 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 4 3/4 per cent.
Near-term prospects for economic growth outside North America appear to be slightly stronger than anticipated in the July Monetary Policy Report Update (MPRU), while near-term economic prospects for the United States are weaker than expected. It now seems likely that the adjustment in the U.S. residential housing sector will be more pronounced and protracted, exacerbated by recent developments in financial markets. On balance, this implies weaker demand for Canadian exports than had been expected at the time of the July MPRU.
In Canada, total and core CPI inflation in July, at 2.2 per cent and 2.3 per cent respectively, continued to be above the inflation target but generally in line with the Bank's expectations. The Canadian dollar has also largely traded in the range assumed in the July MPRU. At the same time, the pace of economic growth in the first half of this year was above the Bank's expectations. It now appears that the Canadian economy is operating further above its production potential than was estimated in July. Domestic demand remains robust, buoyed by a continuing strong labour market and higher-than-expected increases in home sales and prices. However, recent developments in financial markets have led to some tightening of credit conditions for Canadian borrowers, which should temper growth in domestic demand.
Against this background, the Bank judges that the current level of the target for the overnight rate is appropriate. However, there are significant upside and downside risks to the outlook for inflation. On the upside, there is a possibility that household demand in Canada could be stronger than anticipated, while on the downside the ongoing adjustment in the U.S. housing sector could be more severe and spill over to the U.S. economy more broadly. In addition, there is uncertainty about the extent and duration of the tightening of credit conditions in Canada and, hence, about the tempering effect this will have on growth in domestic demand.
The Bank will continue to closely monitor evolving economic and financial developments. A full update of the Bank's outlook for growth and inflation, including risks to the projection, will be set out in the Monetary Policy Report, to be published on 18 October 2007.

Update

The latest rate news has the Bank of Canada looking very hard at raising the Bank rate by .25% in September, but there are many detractors who say that the incredible rise in the Canadian dollar is going to be the dampening factor on the economy, not interest rates. The longer term rates are holding steady. The news in the States has the rates staying where they are (less pressure on Bank of Canada, more pressure on our currency to rise).

Co-Borrower or Guarantor?

What should I do?I was raised the question the other day from a great client: "What exactly is the difference between a guarantor and a co-borrower?" since many people use the term interchangeably.I replied with the answer. "Guarantors are required to sign for the mortgage, but are not on title to the property. While co-borrowers are required to sign for the mortgage AND be on title to the property. In the event of default, the lender/insurer can take immediate action against all borrowers, including co-borrowers, which is not always the case with guarantors."Just a little note. Guarantors can usually be taken off the mortgage within one year of the term. Only if there is a good re-payment history in this first year.

Fixed rates

I guess we couldn't be blessed for such low rates any longer! Generally speaking though, rates are still quit low.

With the increase in the Canadian Dollar, and the rise of bond rates and other factors, the fixed rates have gone up by over half a percent in the last little while. I go away for a short honeymoon to come back to higher rates! The five year posted rate is at 7.20% today. We're not too sure what's going to happen with the fixed rates, however, the way things are going today they may go up a little more. Hopefully the Canadian dollar will lose some momentum and start to come back down, which is not the prediction by CIBC world markets. They expect the dollar to be on par with the USD by the years end.

Variable rate mortgages are looking even better these days.

80% Conventional?!

Welcome to a new age of mortgage borrowing. All the rules have been thrown out and the new ones are being written every day, after years of the same lender attitudes that kept many people from home ownership.
The Bank Act has been amended as of April 23, 2007 to change the conventional financing ceiling from 75% to 80% of the value of the property. This means that no longer will borrowers be paying high ratio mortgage premiums provided they have either a 20% downpayment or 20% equity in the property. This will save thousands of dollars in fees that otherwise cut into a homeowners equity.
This new rule also applies to revenue property financing although lenders are a little bit slower to announce that they are willing to go the full 80%. Remember that Canadian lenders tend to run pretty conservative (read tight) when it comes to Canadians trying to make some money at Real Estate investing.
Note also the new relaxed rules regarding borrowers who are newer to Canada and who might not yet have a long career track record. With good credit the waiting time to qualify for a mortgage has been drastically reduced. It is immigration that will be driving the net growth in this part of the world and the lending community is recognizing this.
It is about time that the mortgage world became reflective of today's borrower. New Canadians, Self Employed, and people with smaller downpayments can all buy and afford a home today like never before. The mortgage lenders are rewriting the rules and the winners are the borrowers.