Canadian Mortgage Rates - Going Up or Down

[00codefinder]

Hi everyone,

I purchased an home about 4 months ago and got fixed variable rate of 4.13. Just looking for advice, should I continue with the variable or lock it in. Whats the outlook for mortgage rates?

Thanks,

C.

[newbeetle]

what do you mean by fixed variable rate ? Is it fixed or variable?:confused:

[Anonymouse]

That's a decent rate. Historically, people do better with variable rate mortgages because the banks charge too much of a premium for the variability in the rate at which they (banks) can borrow.

The calculation I make is to add up the extra interest costs associated with the term, and ask whether that price is worth the peace of mind of having a fixed rate. So far, the answer has been that it is not.

[pdurple]

Hi everyone,

I purchased an home about 4 months ago and got fixed variable rate of 4.13. Just looking for advice, should I continue with the variable or lock it in. Whats the outlook for mortgage rates?

Thanks,

C.

You ask 10 top economists and you'll likely see them split at 5-5.

[dux]

what do you mean by fixed variable rate ? Is it fixed or variable?:confused:

+1... never heard of fixed variable rate... :confused:

[joegrecoant]

i think he got CLOSED variable...

[gomyone]

You ask 10 top economists and you'll likely see them split at 5-5.

...actually consensus has the bank of canada rate holding steady this month and possibly cuts in October or December. I don't believe anyone on the street is forecasting a hike in rates.

To the OP - I assume you are asking whether it would be a good time to lock in your variable rate mortgage? While that is an individual decision based on risk tolerance - I think it would be wise to stay the course with your variable - there could be at least 25bps-50bps of further easing on the table (which as you know amounts to considerable interest savings).

Will rates eventually rise? Of course they will - but no one knows exactly when - though it won't be anytime soon given that the slowdown in global economic growth seems to be trumping the inflation concerns. But I think if you ask most economists, they would not "foresee" a cumulative increase of more than 300bps over the next hiking cycle. (This is based on the current inflation target range, potential GDP growth and a taylor rule approximation for a neutral level for policy rates).

[00codefinder]

Thanks for the responses. Yeah I meant to say closed variable rate, sorry for the confusion. Yeah I think I'll stick with the variable for now.

[grant]

Inflation is above the target band (1-3%) in canada and the financial liquidity crisis is merely on hold while governments temporarily extend financing.

Eventually the BOC's going to have to enforce their mandate and raise short term rates. (barring a big drop in commodities which have been responsible for the high inflation). Also eventually the global banks are going to have to face their liquidity crunch which will reduce the amount of money available for lending, driving up investor rates.

I usually avoid prognosticating but that's why i think a year from now, there's a small chance rates will be the same, and a big chance that rates will be higher.

[antman59]

...actually consensus has the bank of canada rate holding steady this month and possibly cuts in October or December. I don't believe anyone on the street is forecasting a hike in rates.

To the OP - I assume you are asking whether it would be a good time to lock in your variable rate mortgage? While that is an individual decision based on risk tolerance - I think it would be wise to stay the course with your variable - there could be at least 25bps-50bps of further easing on the table (which as you know amounts to considerable interest savings).

Will rates eventually rise? Of course they will - but no one knows exactly when - though it won't be anytime soon given that the slowdown in global economic growth seems to be trumping the inflation concerns. But I think if you ask most economists, they would not "foresee" a cumulative increase of more than 300bps over the next hiking cycle. (This is based on the current inflation target range, potential GDP growth and a taylor rule approximation for a neutral level for policy rates).

How long is the next hiking cycle?

[gomyone]

How long is the next hiking cycle?

...are you asking how long UNTIL the next hiking cycle? Barring a huge increase in core inflation (which is not going to happen IMHO because commodity prices are falling now in recognition of the global growth slowdown) I don't think the bank of canada will start hiking rates until late in 2009. Given that a neutral bank of canada rate is in the range of 4.5 - a cumulative 150bps in hikes can reasonably be expected once they get going.

I should mention however, that contrary to another post above, its still conceivable that the Bank could cut rates later this year or early next year. The credit crunch and housing mess in the US continues to inflict pain and that economy could see a major slowdown over the next few months - that will hit Canada's economy too and even lower rates may be needed. If growth slows down enough, then that-in-itself will put downward pressure on inflation (primarily through weaker wage growth). If you look at comments by the bank of canada - they are anticipating that inflation in this cycle has already peaked.

[grant]

Yes if the BOC thinks economic slowdown will pull inflation back on-target then of course it will leave rates alone. My gut is that it's 50/50 we'll see the target rate going up within the next 6 months or so. The big thing is: oil, grain, and perhaps other commodity prices are up for GOOD, even if they drop from current highs we're not going to see 2004 prices again. Now that those increases working through the economic chain i think we'll see it pushing inflation up for a long time.

I'm a lot more confident that long term rates, i.e. the ones set by investors (say 3 years or longer) will be going up by at least half a point within the next year.

The irony is that there's lots of cash floating around the world looking for a place to be, and spare cash tends to drive inflation. But investors are nervous after seeing all this bad debt that supposedly was AAA rated, so they don't want to actually invest it without higher yields.

Just my finger-in-the-air opinion, and I have no credentials to back me up :)

[gomyone]

Yes if the BOC thinks economic slowdown will pull inflation back on-target then of course it will leave rates alone. My gut is that it's 50/50 we'll see the target rate going up within the next 6 months or so. The big thing is: oil, grain, and perhaps other commodity prices are up for GOOD, even if they drop from current highs we're not going to see 2004 prices again. Now that those increases working through the economic chain i think we'll see it pushing inflation up for a long time.

I'm a lot more confident that long term rates, i.e. the ones set by investors (say 3 years or longer) will be going up by at least half a point within the next year.

The irony is that there's lots of cash floating around the world looking for a place to be, and spare cash tends to drive inflation. But investors are nervous after seeing all this bad debt that supposedly was AAA rated, so they don't want to actually invest it without higher yields.

Just my finger-in-the-air opinion, and I have no credentials to back me up :)


...when talking about "target" inflation keep in mind that core (which is the explicit target rate used by the bank) hasn't breached 1.5% by very much despite headline jumping up recently mostly because of gas. Since core is still lower than target, the inflation risks at present aren't there.

Will core inflation move up materially in the months ahead? Probably not. yes, commodities are at very high levels and will stay that way. But on a year-over-year basis (which is how inflation is expressed) - recent commodity price declines will push year-over-year inflation down not up. Secondly, a slowing Canadian/US economy will mean less traction for higher wage growth (which has the biggest impact on core inflation).

[smartweb]

In the short term the rates will stay stable or may even go down slightly, however soon or a later they will start going up rapidly as inflation accelerates.

[grant]

...when talking about "target" inflation keep in mind that core (which is the explicit target rate used by the bank) hasn't breached 1.5%[...]
Actually the target is for total CPI, not core CPI. Because the core CPI provides operational guidance, that may explain why the BOC has been slow to respond to the recent spike.

(DanielCarrera has written some incredibly informative posts on the subject, and he's the one who twigged me to that detail.)

http://www.bank-banque-canada.ca/en/graphs/notes-1-target.html

The target range established by the Bank of Canada and the federal government within which the Bank aims to contain annual inflation as measured by the rate of change in the total CPI.
[...]
[...]the Bank of Canada finds it very helpful to use the core measure of inflation as an operational guide to policy.

[dealguy2]

Commodities are unwinding as we speak. Rates will be coming down for sure.

[gomyone]

Actually the target is for total CPI, not core CPI. Because the core CPI provides operational guidance, that may explain why the BOC has been slow to respond to the recent spike.

(DanielCarrera has written some incredibly informative posts on the subject, and he's the one who twigged me to that detail.)

http://www.bank-banque-canada.ca/en/graphs/notes-1-target.html

The target range established by the Bank of Canada and the federal government within which the Bank aims to contain annual inflation as measured by the rate of change in the total CPI.
[...]
[...]the Bank of Canada finds it very helpful to use the core measure of inflation as an operational guide to policy.

...yes - the explicit target is total but what I meant to say was that core was an "implicit" target (I think I wrote explicit). Given the volatility in total (headline inflation) the bank will set policy by changes in core.

...either way, its a moot point - inflation, no matter how its defined, is going to be yesterday's news. GIven the softness in developing economies and the declines now occuring in commodity prices (granted they are still at high levels but look at the size of selloffs happening in commodity-heavy stock exchanges including the TSX), I think we might all be talking about "deflation" in the months ahead. This brings up an important point - given the lags with which monetary policy works, the policy rate is set based on the outlook for inflation 12 - 18 months forward, not based on today's situation or what we have seen in the rear view mirror. Case in point, long term bond yields todaying are actually trading near 50 year lows!