Rates likely to stay low for longer than expected
Another Bank of Canada meeting, another decision to keep the overnight lending rate at 1% (keeping the Prime rate at 3%). No surprises here, as inflation and growth are well below their targets and unemployment rates of 7.1% Canada-wide far exceed the target of 6.5%. What did change for the first time in years was they finally gave up on hinting of future rate hikes. The Bank of Canada adjusted their targets after a weak first half of 2013, projecting 2% inflation (which would indicate a potential rate hike) by the end of 2015.
Shortly before the announcement, Scotiabank among other major banks in Canada and the US moved back their predictions for the prime rate to remain flat from early 2015 to “well into 2016”, amid speculation of the adjusted growth forecasts.
Fixed rates have also reached four month lows after soaring during May and June, immediately after the US fed hinted at reducing or removing their “bond buyback” program. The initial announcement that they may be removing their artificial demand for bonds created large upswings in bond yields, resulting in a 1% hike from their lows of early June at 1.07% up to 2.17% in early September. The trend reversed after the US fed announced that this would have too great an impact on financial markets (in a negative way) and stated that they will continue this program.
What do bond yields have to do with mortgage rates?
Fixed rates are about 98% correlated with bond yields, so the short answer is “a lot”. Generally fixed rates offered through major banks are at about 1.7% above bond yields, which would indicate that 5yr fixed rates should be at around 3.4% today (as of Oct 25th, bonds are at 1.71%). If you are interested in knowing where bond yields are heading, bookmark and monitor this website: http://www.investing.com/rates-bonds/canada-5-year-bond-yield.
With variable rates of Prime -.4% (2.6%) comparing well vs a current 5yr fixed rate (3.59%), this will likely result in a larger number of borrowers settling on a variable rate as they enjoy a 1% savings over what would look to be a minimum of 2-3 years. Unless fixed rates continue to drop quickly or the variable rate outlook changes, make sure you at least take a variable rate into consideration.
Kyle Green is our mortgage expert, you can reach him through his website www.kylegreen.ca