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Which direction are mortgage rates headed?

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In a very dovish statement, the Bank of Canada acknowledged this morning that the slowdown in the Canadian economy has been deeper and more broadly based than it had expected earlier this year. The Bank had forecast weak exports and investment in the energy sector and a decline in consumer spending in the oil-producing provinces in the January Monetary Policy Report. However, as indicated by the mere 0.1% quarterly growth in GDP in the fourth quarter, the deceleration in activity was far more troubling. Consumer spending, especially for durable goods, and the housing market were soft despite strong jobs growth. Both exports and business investment were also disappointing. Today's Bank of Canada statement said, "after growing at a pace of 1.8 per cent in 2018, it now appears that the economy will be weaker in the first half of 2019 than the Bank projected in January."

As was unanimously expected, the Bank maintained its target for the overnight rate at 1-3/4% for the third consecutive time and dropped its earlier reference for the need to raise the overnight rate in the future to a neutral level, estimated at roughly 2-1/2%. The Bank also added an assertion that borrowing costs will remain below neutral for now and "given the mixed picture that the data present, it will take time to gauge the persistence of below-potential growth and the implications for the inflation outlook. With increased uncertainty about the timing of future rate increases, the Governing Council will be watching closely developments in household spending, oil markets, and global trade policy."

At the same time, Governor Poloz seems reluctant to abandon entirely the idea that the next step is likely higher -- making him a bit of an outlier among industrialized economy central bankers.

We are left with the view that the Bank is unlikely to hike interest rates again this year. The global economy has slowed more than expected and central banks in many countries, including the U.S., have moved to the sidelines. Market interest rates have already dropped reflecting this reality.

According to Bloomberg News, "swaps trading suggests investors are giving zero probability that the Bank of Canada will budge rates, either higher or lower, from here. The Canadian dollar extended declines after the decision, falling 0.7 percent to C$1.3438 against the U.S. currency at 10:04 a.m. Yields on government 2-year bond dropped 6 basis points to 1.68 percent."

If you have a variable rate mortgage and are undecided to lock in or not, and would like to discuss specifics... give us a call for a free, no-obligation consultation.

 

What will the Bank of Canada's Next Move Be?

The next rate setting by the Bank of Canada will be on March 6th and market watchers are not expecting any change.

Governor Stephen Poloz set a fairly dovish tone in his recent speech to the Chamber of Commerce of Metropolitan Montreal.  Poloz called the bank’s current rate of 1.75%, stimulative because it is still below the rate of inflation, which is running at about 2.0%.  And Poloz said the rate’s climb into the neutral range of 2.5% to 3.5% is “highly uncertain”.

A neutral policy rate is one which neither stimulates nor constrains the economy.

The central bank remains concerned about uncertainties that include the effects of higher interest rates on heavily indebted Canadians, stricter mortgage rules, how business investment proceeds in the current global trade environment and the current unexpected slump in the price of oil.

“We will remain decidedly data-dependent as the domestic and international situations evolve,” Poloz said.

Canada’s improving economy has allowed the BoC to raise rates five times since mid-2017, but there has been no movement since last October.

Many analysts now expect there will be no more than two, quarter-point increases in 2019, and then not until later in the year.  The bank has no compelling economic reasons to move on rates and the next federal budget will be delivered on March 19th, less than two weeks after the next setting date.  That alone would be enough to keep the bank from making any changes.

The campaign for the upcoming federal election, set for October 21st, will also hold the bank in check.

   

A softened stance on future rates hikes into 2019

Back in October it was “clear sailing, all ahead full”.  Now the forecast is calling for headwinds and choppy seas and poor visibility.

When the Bank of Canada bumped its trend setting rate to 1.75% the economic statement spoke of full capacity, full employment, growing wages and rising inflation.  The Bank and market watchers were confident interest rates would continue their measured, upward march.

But that straight path has taken a turn, and in December the BoC did not move up, it stepped aside.

In the main, the central bank is being dictated by international developments.  Expanding trade disputes, obstructive tariffs and falling oil prices are weighing on the Canadian economy.  The uncertainty has led to a pull-back in business investment and projections for GDP growth have been reduced.

The Bank has shifted away from saying the economy is operating “at” capacity and is now being vaguer, saying the indicators show the economy is operating at “close” to capacity.  In the language of central bankers that is a very wide gap.

The Bank of Canada has also softened its stance on future rate hikes.  It had been saying rates would have to climb to their neutral level – neither stimulating nor retarding the economy.  Now it says rates will have to rise into the neutral range.  The Bank is not saying what that range is, only that we will know it when we see it.  Given the inflation forecast we may be much closer to that range than previously thought.

All that said, the variable rate mortgage is more so a viable alternative for some. Contact us for a no-charge assessment of your current mortgage today!

   

Residential Market Commentary - CMHC's new rules

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Canada Mortgage and Housing Corporation is making a couple moves that will send ripples through the mortgage market.  One could give lenders access to more confidential financial information about borrowers.  The other could ease frustrations for a group of borrowers that has consistently had problems securing loans.

According to documents obtained by Reuters, through a freedom of information request, the federal housing agency wants the Canada Revenue Agency to take a “more direct and formal role” in verifying income statements made on mortgage applications.  Right now the CRA does not verify income claims for lenders, even with the permission of the borrower/taxpayer.

A two-year plan drafted by CMHC shows the agency is concerned about a systemic risk posed by mortgage fraud.  The agency has said there is no evidence of widespread fraud in Canada, but it also says its information is limited.

The CMHC plan says paperless transactions, pressures to close deals quickly, rising prices and new regulations can “create strong incentives for individuals or mortgage professionals to engage in … fraud.”  A spokesperson also says CMHC is developing data-driven systems to screen for commission fraud, where a lender or a broker may have encouraged a borrower to exaggerate income claims.  The documents reveal the agency intends to start publishing statistics on mortgage fraud.

At the same time CMHC says it wants to make it easier for the self-employed to qualify for a mortgage.  The agency says it is giving lenders more guidance and flexibility to help self-employed borrowers.  The effort focuses on those who have been running their business – or have been in the same line of work – for less than 24 months.  The new policy is set to take effect October 1st.

   

A CHIP Customer Story

Customer Story – Silver Divorce (It happens)

The client was referred to a Mortgage Broker by an existing client to help out his mother with the financial aspect of her separation/divorce.

Client Details:

Early 70’s, retired with limited income, Mrs. Smith wanted to keep the only home she has known her entire adult life.  In order for her to keep her house, she required funds to pay out her husband for the balance of the division of assets.  She had sufficient income to qualify for a “traditional” mortgage, but she did not want the burden of payments given she was going to be on her own and wanted to have a little breathing room.

Solution:

Although Mrs. Smith had some investments she could have used to buy out her spouse, she felt more secure leaving her investments alone and to tap in to the equity to satisfy her requirement under the separation agreement.  We set up a CHIP for the maximum she approved for and advanced only what she needed to pay out her ex.  This left her with some available credit to use down the road if she needed it after things settled.

Outcome:

Having an unexpected major life change come upon her, she was able to meet her financial obligations in the divorce while not incurring any extra monthly obligations that would have put an added strain on an already difficult time in her life.

Mrs. Smith was thrilled that her broker was able to come up with such a suitable solution for her.  She was able to keep the home she loved and to maintain some normalcy in her retirement.
   

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