Friday, June 20, 2008

Bank of Canada rate freeze could boost our mortgage rates

Bank of Canada rate freeze could boost our mortgage rates
Alia McMullen, Financial Post Published: Wednesday, June 11, 2008
Fixed mortgage rates could rise in the coming days as banks adjust to a two-day rally in government bond yields that received extra ammunition on Tuesday when the Bank of Canada kept interest rates unchanged.

But any increases in fixed mortgage rates may be limited by competition for customers in a cooling housing market, particularly as credit market conditions improve.

Eric Lascelles, chief economist and interest rate strategist at TD Securities, said fixed mortgage rates, which tend to track movements in the Canada Government five-year bond yield, could rise if the banks follow historical trends. The CGB five-year yield has surged 12.6% in the past two days to end at 3.6% on Tuesday, signalling the market forecasts future interest rates to be higher than previously expected.

The surge in bond yields, which move inversely to bond prices, began on Monday as the U.S. Federal Reserve and the European Central Bank talked up inflationary risks. The yields were catapulted even higher Tuesday by the Bank of Canada's surprise decision to keep the benchmark interest rate at 3%. The market had expected the rate to dip to 2.75%, but Mr. Lascelles said the central bank's emphasis on inflation had caused many dealers to now price rate rises into their positions.

"The concern about inflation has grown as commodity prices have again skyrocketed," Mr. Lascelles said. He has now wiped interest rate cuts out of his official forecast, but said they could not be completely ruled out given pressures on the Canadian economy.

"We don't think the Bank of Canada is going to leap wholeheartedly into rate hikes immediately; we think they will be quite cautious on hold for the time

being," he said.
Vince Gaetano, vice-president of Monster Mortgage and winner of Canadian Mortgage Professional magazine's Mortgage Broker of the Year award, said there was still a chance that interest rates will fall one more time in July. However, he said the housing market was not in any need of further interest rate cuts to support activity.

While the bond market shifts interest-rate expectations higher, Mr. Gaetano said there is still room for fixed mortgage rates to ease. Variable rate mortgages generally move in tandem with the Bank of Canada's key interest rate, and therefore would remain unchanged.

"The fixed rates still tend to be high compared to the five-year bond market," he said. The upheaval caused by the credit crisis caused the difference between the key interest rate and fixed mortgage rates to increase, with the spread currently sitting at about 290 basis points compared with the historical average of 275 basis points.

"If the market's slowing down, there's going to be a bigger appetite by the banks to put out more money and that may be at a cheaper costs," Mr. Gaetano said. "If there's not enough sales out there, the banks are going to start pricing more aggressively."

This was written in the Financial Post Thank you for your real estate inquiry.

I can't believe that because the Bank of Canada did NOT reduce their interest rate, that lending rates will go up. Seems like a little gouging to me.

Mark

A. Mark Argentino
P. Eng. Broker
Specializing in Residential & Investment Real Estate


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