Toronto Real Estate and Neighbourhoods Blog | Move Smartly

Monday Morning Interest Rate Update (Feb 13, 2012)

David Larock in Mortgages and Finance, Home Buying

The euro-zone crisis returned to its roots last Friday when Greek riots erupted in response to demands for still more austerity measures from the “Troika”: the European Commission, International Monetary Fund and the European Central Bank (but really Germany).

While the markets have been more focused on Italy and Spain lately (where bond-yield pressures have begun to ease), Greece remains the euro zone’s bailout test case. Any deals struck with the Greeks will set a precedent for future bailouts; and with Portugal waiting in the wings, there is already a line forming. 

Let’s recap how Greece and the wider euro zone have reached this point:

At its most basic level, Greece’s economy is simply not competitive. Its government spends more than its citizens pay in taxes, and foreign investors are no longer willing to fund the country’s perpetual shortfall unless wholesale changes are made to how it operates.

If Greece wants more money, and it needs 14.5 billion euros by March 20^th to repay a bond that it has coming due, its citizens are forced to accept austerity measures that probably feel like open-heart surgery, a liver transplant and a lobotomy all rolled into one. To wit, the Troika is demanding that Greece slash its minimum wage by 22%, gut its government entitlement programs (including sacred pension plans), and fire its public sector employees by the tens of thousands in wave after wave of layoffs that will stretch out over many years.

To the average Greek, this must make an already dire situation look hopeless. The national unemployment rate is at 20% (youth unemployment is much higher), the country is already in its fifth year of recession, and all of this is being orchestrated by an unelected prime minister at the behest of foreign leaders. Greece’s ultimate road to salvation will only come when the economy achieves sustainable growth, and it’s hard for any observer inside or outside the country to see how they achieve that anytime soon.

It also isn’t lost on the Greeks that almost all of the loans they would be defaulting on were made by foreign banks, and that the largest holders of this outstanding debt reside in Italy and Spain. These already vulnerable countries can ill afford to bail out their banks in the event of a full-scale Greek default, and since German and French banks are the largest holders of Spanish and Italian bonds, it is easy to see the potential for widespread contagion. The Greeks know that their foreign taskmasters have skin riding on their fate. 

Greece’s current government is convinced that all of the alternatives to additional austerity measures are untenable and last night it pushed through the latest required reforms, but democracies often have elections at inconvenient times, and Greece may hold one as early as this spring. That could trigger a new round of brinkmanship between a more populist Greek government and euro-zone leaders who believe that their own political survival depends on convincing their respective voters that today’s bailouts are only being provided in exchange for deep structural changes in the countries that needed them.

Five-year Government of Canada (GoC) bond yields were trending higher early in the week as investors grew more optimistic about the strength of the U.S. recovery. Then Greek riots brought the euro-zone crisis back to centre stage on Friday and yields beat a hasty retreat. We finished 5 basis points higher for the week and closed at 1.41% on Friday.

Several Big Five banks withdrew their three and four-year fixed rate specials late last week, citing higher funding costs due to “global economic concerns”. This convenient justification is not supported by the data, and perhaps in recognition of this, several other lenders have decided to keep their fixed-rate specials in place for at least a little longer.

Variable-rate mortgages are still only available with small discounts off of prime rates, and are less than .5% below fixed-rate mortgages that are offered for the same term. For my money, that just doesn’t give you enough of a margin of safety to work with and it makes fixed rates look more attractive by comparison.

The bottom line: Each time the euro-zone crisis flares up, investors prioritize the preservation of their capital over a return on their capital, and this drives up demand for ultra-low-risk investments like GoC bonds. ‘Heightened market-risk with no subsequent follow through’ is the sweet spot for GoC bond yields, and by association, our mortgage rates. Recent euro-zone events lead me to believe that Canadian mortgage borrowers will continue to benefit from this sweet spot for the foreseeable future.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Monday Morning Interest Rate Update (February 6, 2012)

David Larock in Mortgages and Finance, Home Buying

Employment and income levels provide critical gauges of the underlying strength in an economy. In the most basic sense, when good jobs are plentiful and incomes are rising faster than the rate of inflation, economies grow. When unemployment levels rise and average income levels can’t keep pace with inflation, economies contract. That’s why employment data are so important – they are the canaries in our economic mine shaft.

Statistics Canada released its latest employment report last Friday and the numbers were not encouraging. We added a paltry 2,300 new jobs in January and the report showed overall unemployment rising to 7.6% (a nine-month high). The biggest job gains were made in sectors that tend to be low paying such as “culture and recreation” and “personal and household services” and the biggest job losses were in finance, real estate and insurance, which are higher-than-average paying sectors. From an income standpoint, there was no change in average hours worked and our average earnings grew by 2%, which is less than our current rate of overall inflation (2.3%). In summary, this report extended our string of disappointing employment data for yet another month.      

Anyone looking for a silver lining found a small thread in our private sector, which added jobs for the third consecutive month. We’ll need that trend to continue (and strengthen) in order to offset planned public-sector cutbacks. There was also encouraging news from south of the border.

The U.S. jobs report (also released on Friday) gave the market a welcome upside surprise. The U.S. economy added 243,000 new jobs last month, bringing its unemployment rate down to 8.3%, which is the lowest it’s been in three years. The gains were broadly based and as an added bonus, the report added another 60,000 jobs to previous estimates from the prior two months.

Despite this welcome news, I don’t think the U.S. Fed’s prediction that their policy rates will stay ultra-low until late 2014 is up for revision any time soon. For one thing, the report only counts people who are actively looking for work, and many unemployed Americans are no longer counted in the numbers because they have given up their search. Also, nearly half of America’s thirteen million unemployed have been out of work for more than six months, and the chronically unemployed are much harder to integrate back into the workforce.

Even if the U.S. economy maintains its surprisingly robust pace of job creation, U.S. economist John Mauldin estimates that it would take another five years of uninterrupted hiring growth to return the job market to 2007 levels. When you consider that the U.S. public sector needs to implement massive spending cuts at all levels, it’s hard to imagine that the private sector will be able to maintain today’s pace and make up for public sector job losses over any extended period.

Five-year Government of Canada bond yields fell in the early part of the week but then rose on Thursday and Friday to finish four basis points higher on Friday, at 1.35%. My best guess is that the rise in yields was underpinned by optimism that the U.S. economic rebound is now on a more solid footing, thanks in no small part to the positive jobs report. If this short-term momentum continues and if yields push past the 1.40% level, lenders may consider raising fixed rates. Given that, locking in a pre-approval at today’s rates would be prudent.

I don’t think variable-rate mortgages are compelling when the gap between fixed and variable rates is less than .5%. That said, borrowers considering a variable-rate mortgage will find it a little easier to qualify next Wednesday when the Bank of Canada lowers its qualifying rate from 5.29% to 5.14%.

The bottom line: When we combine Canada’s most recent GDP numbers with the latest jobs report, the data don’t suggest any sustainable upward pressure on our interest rates. As such, low mortgage rates should continue to be a bright spot on an otherwise cloudy economic day.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Monday Morning Interest Rate Update (January 30, 2012)

David Larock in Mortgages and Finance, Home Buying

Last week’s big news was the U.S. Federal Reserve’s announcement on Wednesday that “economic conditions - including low rates of resource utilization and a subdued outlook for inflation over the medium run - are likely to warrant exceptionally low levels for the federal-funds rate at least through late 2014”.

Point of Clarification: The U.S. federal-funds rate, also called the policy rate, is the U.S. equivalent to the overnight rate of the Bank of Canada’s (BoC). It is the floor rate on which all U.S. short-term interest rates are based.   

This announcement extended the U.S. Fed’s previous target for the beginning of short-term rate hikes by another year and a half, and while it is still unusual for the U.S. Fed to make its views on the future direction of interest rates so transparent, the announcement didn’t come as a total shock to the market. After all, the U.S. Fed has now had a 0% policy rate for three years and has tripled the size of its balance sheet over that period. At the same time, the U.S. federal government has been pumping radical levels of stimulus into the economy, while running annual deficits that have averaged a colossal 10% of the nation’s GDP. Despite all of these measures, U.S. GDP growth has been anemic at best, and the country now looks mired in a classic liquidity trap (a phenomenon I first wrote about in the summer of 2010).

So what does this mean for Canadian mortgage rates? If the Fed stays on hold until late 2014, it is unlikely that the Bank of Canada will raise rates much beyond current levels between now and then. While BoC Governor Mark Carney has insisted that Canadian monetary policy is not entirely beholden to U.S. monetary policy, how could it not be substantially affected when higher Canadian interest rates will drive the loonie above par with the greenback and raise the cost of everything we sell to the U.S.? The higher the loonie soars, the greater the impact on our export-led businesses, which sell 80% of what they produce to U.S. buyers. This reduction in export-led growth would cause our economy to slow and exert downward pressure on rates.

Mr. Carney has said that Canadian rates can be theoretically sustained at levels as much as 2% higher than U.S. rates (we are about 1% higher today), but just because he wants the world to believe that is true doesn’t make it so. Think of the relationship between Canadian and U.S. interest rates as an elastic band - the harder the band is stretched by the difference in our rates, the harder other forces like our exchange rate pull it back in the other direction.

Five-year government of Canada bond yields were down 9 basis points this week, closing at 1.31% on Friday. As predicted in last week’s Update, the run up in yields that we saw the previous week was short lived. When you take the long view, the fundamentals for ultra-low Canadian bond yields are still well entrenched. A few lenders raised rates early last week, but most held firm, and rock-bottom promotional rates are still widely available.  

Variable-rate mortgage holders with deeply discounted rates should again raise a glass to Chairman Bernanke and the U.S. Fed. If the rate of Canadian household-debt growth reverses its recent slowing trend and starts re-accelerating, continued low rates in the U.S. make it far more likely that it will be Mr. Flaherty making more changes to our mortgage rules, rather than Mr. Carney raising the BoC’s overnight rate.

The bottom line: The U.S. Fed’s announcement has confirmed what I have written in this space many times; both the global and U.S. recoveries are going to take much longer than many (but not all) experts have been predicting and our fixed and variable-mortgage rates will stay low until the world looks very different than it does today.

(For a more detailed explanation of what I mean when I say that, check out my Winter Quarterly Mortgage Market Update which, coincidentally, was posted on the same day that the Fed offered its new guidance.)

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Winter Mortgage Market Update (2012)

David Larock in Mortgages and Finance, Home Buying

This quarter’s Mortgage Market Update is a good news/bad news story.
 
I’m an optimist at heart so let’s start with the good news. Barring a global and systemic financial meltdown, our mortgage rates will probably stay at their current rock-bottom levels for an extended period of anywhere from one to five years.

The bad news is that these ultra-low rates will be the by-product of a massive global deleveraging process, which will be as necessary as it will be painful to the world’s most indebted economies. While Canada will not be at the epicentre of this debt purge and while we are somewhat uniquely positioned to endure the coming downturn (more on that later), we will not be immune from the negative effects that deleveraging will have on global economic growth.

Monday Morning Interest Rate Update (January 23, 2012)

David Larock in Mortgages and Finance, Home Buying

The Bank of Canada (BoC) left its overnight rate unchanged at 1.00% last week, and also released its latest quarterly Monetary Policy Report (MPR). The MPR tells us where the BoC thinks inflation is headed and offers the Bank’s perspective on where the greatest risks to the Canadian economy lie. Regular readers of the MPR can also compare the latest report to previous versions to gauge where the BoC’s views have changed at the margin.

For example, the BoC’s latest report said that “several significant upside and down risks are present” and that “the outlook for the global economy has deteriorated and uncertainty has increased”. This implies that the BoC sees greater volatility on the horizon and a broader range of possible outcomes ahead.  The latest report predicted that “the recession in Europe would be deeper and longer than the Bank had anticipated in October” and also said that “the Bank expects the U.S. recovery will proceed at a more modest pace going forward”. Despite this, the Bank said that it now expects the Canadian economy to return to full capacity in the third quarter of 2013, which is a quarter sooner than its previous forecast.

This begs the question. If the BoC is more negative on the prospects of both Europe and the U.S., why does it also think that our economy will return to full capacity more quickly than previously expected? The BoC’s answer is that “very favourable financing conditions are expected to buttress con­sumer spending and housing activity… and the ratio of household debt to income is projected to rise further”.

When one considers how outspoken  BoC Governor Mark Carney has been about the risks that rising debt levels pose to our economy, it was surprising to see the Bank predicting that a continued rise in our household debt levels will act as an effective counterbalance to stronger headwinds from oversees. But back to the earlier point about the broadening range of possible outcomes, the report goes on to say that our high debt levels “could lead to a sharper-than-expected deceleration in household spending”.

Five-year Government of Canada bond yields spiked at the end of last week, closing at 1.40% on Friday and finishing 14 basis points higher overall. It’s interesting that this happened at the same time that lenders finally started dropping their fixed-mortgage rates – a change that was long overdue given that gross-spread levels have been well above normal for some time (even when new lending costs are factored in). If yields continue to surge, the recent fixed-rate drops will be short lived, but I haven’t seen any obvious catalyst to suggest that this will be the case.

Variable-rate mortgage holders got some good news from the latest Consumer Price Index (CPI) released by Statistics Canada on Friday. The CPI dropped from 2.9% to 2.3% and core CPI (which excludes more volatile inputs like food and energy) also fell from 2.1% to 1.9%.  The core number was below the BoC’s projection of 2.2% for Q4, 2011 and is now below the BoC’s long-term target rate of 2%. This latest round of CPI data means that the BoC can continue to take its time before raising rates, and it also vindicates the Bank’s decision last year not to raise rates when higher food and energy prices caused inflation to temporarily accelerate.   

The bottom line: To paraphrase my key take-away from the BoC’s latest MPR, rising household debt levels are expected to provide the fuel needed to drive our economy through tougher times ahead, as long as no one lights a match.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Monday Morning Interest Rate Update (January 16, 2012)

David Larock in Mortgages and Finance, Home Buying

The European Central Bank (ECB) made a bet in December that if they offered unlimited three-year loans to liquidity-starved European banks, those banks would then support ailing euro governments by buying up their bonds and creating enough demand to bring their spiraling bond yields down from the stratosphere. Specifically, they extended more than US$600 billion worth of these loans to 500 banks at a rate of 1% and hoped that the banks would use some of that money to buy-up sovereign debt with yields of 5% or more, locking in a handsome spread for their troubles.

The move was a controversial one, and it was a game changer. Consider that the ECB’s average loan duration was 10 weeks before the huge December auction and has now been blown out to 21 months; the ECB’s mandate has clearly shifted from providing short-term liquidity to acting as Europe’s lender-of-last-resort. Many of Europe’s more conservative stakeholders said that the ECB was doing an end run around treaties that were specifically designed to limit the central bank’s ability to buy sovereign debt. Meanwhile, market watchers questioned whether the banks would respond as expected, predicting that they would use the emergency loans to shore up their shaky balance sheets instead.

Over the short-term at least, the ECB’s big bet appears to be achieving the desired result. European bond yields were sharply lower last week and both Italy and Spain successfully issued new debt at significantly lower yields. That said, this encouraging trend was tempered by Friday’s news that Standard & Poor’s downgraded the credit ratings of nine European countries (most notably France) and by new data indicating that the German economy likely contracted in the last three months of 2011. Germany and France are supposed to act as counterbalances to Europe’s many struggling economies, so neither development is a trend in the right direction.    

Five-year Government of Canada (GoC) bond yields were basically flat last week, closing at 1.26% on Friday as investors continued to seek out safe-haven investments which are becoming harder to find at the same time that demand for them continues to grow. While steadily falling GoC bond yields have substantially increased our lenders’ profit margins over the past several months, fixed-mortgage rate drops have been slow in coming – until now.

Last week the Bank of Montreal announced a short-term promotion offering a five-year fixed-rate mortgage at 2.99% (the lowest five-year fixed rate ever offered by a major Canadian lender). The product comes with several restrictions, and the promotion is being offered for only two weeks, but it caught the market’s attention and other lenders have finally begun to lower various fixed rates in response. Let’s hope this trend continues – we have been saying that fixed rates have been due for a decrease for some time now.

Variable-rate mortgage discounts are holding steady, but with prime minus 0.20% among the best variable rates available, most borrowers are opting for the safety of the five-year fixed, especially now that the spread between fixed and variable is well under 0.5%.

The bottom line: The ECB had to take a more active role to help pull Europe back from the brink, and their loans have provided some welcome short-term relief to European bond markets. But a crisis caused by excessive credit isn’t likely to be solved by issuing more debt, even at dirt-cheap rates. This was like adding a few more decks to a wobbling house of cards. While Europe’s financial system is now relatively more stable, it is still fundamentally flawed, and the only real elixir, economic growth, remains in short supply.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Monday Morning Interest Rate Update (January 9, 2012)

David Larock in Mortgages and Finance, Home Buying

Let’s begin the new year where we finished off the last one - in the euro zone.

After a brief period of calm as the calendar flipped to 2012, bond yields in the euro zone’s vulnerable member states are moving higher again. Most notably, Italian bond yields closed at 7.13% on Friday. This is significant because Greece, Ireland, and Portugal all sought bailouts shortly after their ten-year government bond yields breached the 7% threshold, and Italy’s bond market, the third largest in the world, is simply too big to save.

Italy’s current high borrowing costs will be of increasing importance in 2012 because the country must refinance more than US$ 400 billion worth of its existing bonds over the next twelve months. Having to roll over that debt at today’s rates will substantially increase Italy’s borrowing costs, expanding its budget deficit and further straining its government finances. It’s hard for me to see how Italy’s fragile economy, already absorbing harsh new austerity measures, will grow its way out of its current debt problems. I find it much easier to envision the knock-on effects of higher borrowing rates heightening investor fears and pushing interest costs higher still, in a self-perpetuating vicious cycle. 

I’m not just picking on the Italians here. Spanish ten-year bond yields spiked up 0.6% last week, as the country revealed a wider than expected budget gap in 2011 (Spanish bond yields closed at 5.71% last Friday, but were as high as 6.7% only six short weeks ago). Keep in mind that Italian and Spanish bond yields are this high despite the fact that the European Central Bank (ECB) has bought about US$ 250 billion worth of sovereign debt since the euro-zone crisis began.

The ECB also recently extended three-year loans totalling about US$ 600 billion to more than five hundred European banks at a super-low 1% interest rate. This was done both as an attempt to ward off the immediate threat of a bank-induced credit crunch, and in the hope that the re-liquified banks would then lend that money to euro-zone governments in need. This attempt by the ECB to stave off a threat and to exit the sovereign debt buying business in one fell swoop may have been controversial, but it’s chilling to think where Europe would be without the ECB’s unprecedented actions.

Closer to home, Statistics Canada released its December employment report, and it was weak across the board. Employment reports are important indicators of where mortgage rates are headed because they tell you whether labour is likely to become more expensive in future. Labour is a pervasive cost that spreads throughout the economy, and higher labour costs spur broad-based price inflation and, by association, higher mortgage rates

While we gained 17,500 jobs last month, the bad news in the detail was that we lost 25,500 full-time jobs and gained 43,000 new part-time jobs instead. Our overall unemployment rate is now at an eight-month high of 7.5% and average hourly earnings have fallen 0.7%. So we have increasing slack in the labour market and the cost of labour is falling – no signs of inflationary wage pressure threatening to drive our mortgage rates higher at this point.  

Five-year Government of Canada (GoC) bond yields were down about three basis points for the week, closing at 1.25% on Friday. Of the world’s fifteen largest economies, only three still enjoy stable AAA credit ratings (Canada, the U.K. and Australia). In an increasingly uncertain world, our government bonds are viewed as ultra-safe, and Canadian mortgage borrowers are direct beneficiaries with five-year fixed rates available at 3.29% or better.

Variable-mortgage rates are still at or a little below prime, which just isn’t compelling for most borrowers. With the spread between five-year fixed vs. variable-rate mortgages now down to .5%, it is much harder to justify the risk vs. reward trade-off of going with a variable rate.  

The bottom line: As we begin the new year, all signs point to both fixed and variable-mortgage rates staying at their current levels, or edging lower for the foreseeable short-term future. The euro-zone crisis continues to stoke demand for our ultra-safe government bonds. Domestically, unemployment reports, like the one that Stats Can just released, suggest that growth, not inflation, will be our main concern in the coming months.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

The Magic of Five Percent: A New Year’s Resolution Worth Keeping

David Larock in Mortgages and Finance, Home Buying

When the calendar flips to a new year, many of us make resolutions to improve our lives. Judging by how busy the gyms get during the first three weeks of January, I’d bet that improving physical fitness is the most popular resolution, but improving one’s financial fitness is probably not far behind. To that end, today’s post will offer you a simple mortgage tip to help you lower your interest cost, pay off your mortgage more quickly, and prepare for higher rates at renewal.

Canadian mortgage rates are at record-low levels and there has never been a better time to put extra dents in your mortgage. The trick is to increase your regular payments by a relatively small amount to chip away at your principal over time, instead of waiting until you have saved up a chunk of money for a large extra payment (which for most of us tends to be a plan whose time never actually comes).

Monday Morning Interest Rate Update (December 19, 2011)

David Larock in Mortgages and Finance, Home Buying

Last week the Bank of Canada (BoC) issued its latest Financial System Review (FSR), and its governor, Mark Carney, gave a speech called “Growth in the Age of Deleveraging”. If you’re trying to gauge where mortgage rates are headed, both links are well worth the read.

The bi-annual Financial System Review basically outlines what the BoC is worried about and explains to what degree. Not surprisingly, the report concludes that “the risks to the stability of Canada’s financial system are high and have increased markedly over the last six months”. Here are the highlights: 

• The BoC’s greatest concerns are “(i) a sharp escalation of the sovereign debt crisis in the euro area; (ii) a much weaker outlook for global economic growth; and (iii) a pronounced retrenchment from risk taking in international financial markets.”
• The report’s general assessment of the euro-zone crisis is that member countries have not responded with appropriate urgency and that their window for pre-empting a full-blown bond-market meltdown is closing rapidly.
• The BoC is also concerned about economic growth in the world’s largest economies, highlighting “the risk that household deleveraging and fiscal consolidation in the U.S. could drag the U.S. economy into another recession” and “an increased risk of a more pronounced slowing of economic activity in China”. (And although not many people are focusing on this elephant in the room yet, if China falters in a major way it will be a game changer.) 
• On the topic of Canadian consumer debt levels: “[Canadian household] credit growth has slowed noticeably over the last six months” but remains a “heightened risk”.
• The report’s overall assessment is that “the global recovery is expected to remain weak and uneven”.  

Mr. Carney’s Monday speech on “Growth in the Age of Deleveraging” was refreshingly candid, and for a person whose words can move markets, he certainly didn’t pull any punches. Here is a summary of what the BoC Governor said (although it is tough to write a summary that does this content-rich speech justice): 

• Global debt has risen to critical levels and only hard choices remain.
• While corporate borrowing helps an economy grow because it leads to increased productivity, government and household borrowing provides an economy with little lasting benefit. (Unfortunately, almost all of the borrowing in advanced countries during this debt super-cycle has come from the latter and not the former.)
• Advanced countries simply can’t borrow their way out of their current predicaments, and they have no choice but to accept the Pyrrhic medicine of deleveraging.

• Europe is in for a long, grinding recovery: “fiscal austerity and structural adjustment will mean falling wages, high unemployment, and tight credit conditions”.
• Canada, relatively speaking, is in the best shape of any country in the G-7, but we are headed in the wrong direction since most of our borrowing is the non-productive consumer kind. We need to wean our economy off consumer spending, and businesses need to make up the difference by investing in productivity and focusing on increasing exports to emerging markets.
• In a related but more general vein, Mr. Carney said that all advanced nations need to retool their economies to replace falling domestic demand with export-led growth. At the same time, emerging countries which can no longer rely on demand from advanced countries must allow their currencies to float (and appreciate versus advanced-country currencies) while shifting their focus to domestic led growth. While this makes good sense, Mr. Carney laments that in actuality, “both sides are [instead] doubling down on losing strategies”.    

Five-year Government of Canada bond yields plunged another 15 basis points last week and closed at 1.18% on Friday as investors continued to prioritize ‘preservation of capital’ over ‘return on capital’. Five-year fixed-mortgage rates inched down last week, with 3.29% now more widely available, but lenders are still pocketing the higher spreads like Scrooge instead of discounting their mortgage rates like Santa.

Variable-rate mortgage discounts continue to shrink, but prime minus .20% are still available from a lender offering attractive terms and conditions. If you’re considering a variable rate and want to see how the potential cost of current variable and fixed-rate five-year terms might compare under different interest-rate projections, check out my latest Rate Simulation analysis (posted last Wednesday).

The bottom line: I’ve said it before but it bears repeating. If Canadian consumer-borrowing rates don’t moderate, and fast, more mortgage rule changes are coming. That’s not exactly music to my ears, but all of the alternatives are worse.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog (movesmartly.com) and on his own blog integratedmortgageplanners.com/blog). Email Dave

Would You Save More With a Fixed or Variable-Rate Mortgage? (Rate Simulator – 2011 Year End Edition)

David Larock in Mortgages and Finance, Home Buying

It’s been three months since we last ran scenarios that compare the potential costs of fixed vs. variable-rate five-year mortgages using today’s market rates. Over that period, five-year variable-rate discounts have shrunk from prime minus .70% to prime minus .20% (which is 2.80% using today’s prime rate), and five-year fixed rates have dropped from 3.49% to 3.39% (or better if you know where to look).

The narrowing gap between today’s fixed and variable rates (3.39% vs. 2.80%) makes it harder to decide between them. Do you take the fixed rate because it gives you payment certainty for a premium of only .59%? Or do you bet that the same subdued economic forecasts that are driving fixed rates down will lead to a drop in the variable rate?