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Today's low Rates & how the experts foresee the rise

2010-09-20 | 10:48:30

Rate Outlook Clear as Mud

"The fact is we're three years in to the global financial crisis and its dynamics still dominate the economic outlook." – BoC chief, Mark Carney

The question everyone wants to know is: How long will that be true? The answer, which is as ambiguous as ever, has a direct bearing on the mortgage rates.

As always, we can count on the “professional predictors” to have an opinion. Here’s a sampling of what they’re saying now, following a week that brought the third consecutive BoC rate increase and an anemic employment report.

The economy will have to worsen further "to prompt the central bank to stop raising rates." - BMO Capital Markets, deputy chief economist, Douglas Porter (Ottawa Citizen)

“…The (Bank of Canada’s) language suggests the bank may pause longer than merely the next meeting or two." - BNY Mellon strategist, Michael Woolfolk (Global)

"In our opinion, the odds favour the Bank of Canada pausing for some time…TD Economics does not anticipate another tightening before March of next year." - TD Chief economist, Craig Alexander (CBC)

“…The bank (of Canada) doesn't know what it is going to do.” – CIBC World Markets Chief Economist, Avery Shenfeld (Vancouver Sun)

“…Rates are low and likely to rise at only a gradual pace in the next 18 months…” - TD Chief economist, Craig Alexander (Globe & Mail)

Do you get the sense that no one really knows where rates will be 12 months from now? If so, you’re right.

But that matters less than one might think. TD’s Craig Alexander told the Globe’s Rob Carrick this week: “Rates are remarkably low by historical standards. People get so hung up on the direction of interest rates. The level matters.”

Translation: Today’s 3.59%-3.79% five-year fixed rates are manna from heaven. So are 2.90% three-year fixed rates and 2.30% variable rates.

Rates are so good in general that most people don’t need to drive themselves to insanity while choosing between fixed or variable rates. As long as you don’t borrow over your head, your finances won’t be decimated by making the wrong choice.

Melanie & Rob McLister, CANADIANMORTGAGETRENDS.COM, September 12, 2010

Insight into the future of our low rates

2010-09-02 | 11:43:27

CIBC World Markets Inc. trims forecast for rate hikes and currency strength in Canada as economic growth outlook dampens abroad

TORONTO, Aug. 18 /CNW/ - Continuing weakness in the U.S. economy may force the Bank of Canada to put interest rate hikes on hold after September, notes a new report from CIBC World Markets Inc.

"North America's story is again darkening," says CIBC's Chief Economist Avery Shenfeld in the latest Global Positioning Strategy report. "We were looking for a material second-half slowdown for the U.S. but as it turns out, it's already happened."

Economic growth stateside from April to June is being revised downward, Mr. Shenfeld notes, and key indicators are pointing to growth that will be slower than anticipated by U.S. monetary policy makers.

And still ahead is a "further fiscal belt tightening in 2011 that will have to be softened, and accompanied by quantitative easing, if the U.S. is to stay out of recession in early 2011 and get back to potential growth by the end of that year.

"Forget about any rates hikes from the U.S. Federal Reserve until sometime in 2012 at the earliest."

While Canada is in much better economic shape - it leads the U.S., Eurozone, U.K. and Japan in first-half growth and has a record gap over the U.S. in the share of working age population holding a job - it "cannot move all the way to normalized interest rates while the U.S. Federal Reserve is still on hold," Mr. Shenfeld contends.

For starters, an interest rate differential of 300-400 basis points would take the loonie "substantially stronger" creating additional headwinds for Canadian economic growth, says Mr. Shenfeld.

Furthermore, the "external environment will be one of less-than-normal growth as fiscal tightening bites in Europe and the U.S., and with our own upcoming fiscal tightening also hitting domestic demand, monetary policy might have to be set at stimulative levels to allow the economy to return to potential and remain there. To keep moving at all, you have to step on the gas if your car is trying to roll up a steep incline."

Mr. Shenfeld doubts that the Bank of Canada "has been shocked enough to forestall a rate hike in September" but his forecast that Canadian growth in Q2 and Q3 will fall below the BoC's outlook will likely warrant a rethinking in the October Monetary Policy Report and in the months to follow.

The report also notes that there are limits to how far the Bank of Canada can diverge from the U.S. Federal Reserve without later regretting it. Episodes in recent years in which rate overnight rates were 2 per cent or more above those stateside resulted in sagging or sacrificed growth. These are "lessons learned, we hope," says Mr. Shenfeld.

"Since a hike at every rate setting date through 2011 would take rates substantially higher than 2%, a pause is coming on the road to tightening."

As a result of the dampened external growth outlook, Mr. Shenfeld has trimmed his call for rate hikes. He sees Canadian overnight rates going no higher than 2% next year as the U.S. Federal Reserve stays on hold.

A less hawkish monetary policy combined with a mixed outlook for commodity prices affected by slow global growth will also likely see the Canadian dollar roughly two cents weaker than earlier forecast over the same horizon, adds Mr. Shenfeld.

The complete CIBC World Markets report is available at: http://research.cibcwm.com/economic_public/download/gps_aug10.pdf

CIBC World Markets Inc. is the corporate and investment banking arm of CIBC. To deliver on our mandate as a premier client-focused and Canadian-based wholesale bank, we provide a wide range of credit, capital markets, investment banking, merchant banking and research products and services to government, institutional, corporate and retail clients in Canada and in key markets around the world.

Deciding Between a Variable or Fixed Rate Mortgage.

2010-07-13 | 11:48:39

As you know, a fixed mortgage has a rate that's locked in for a set number of years, while a variable mortgage has a rate that floats with market conditions. On average over time, you'll usually come out ahead with a variable mortgage. One study suggests that between 1950 and 2007, 90% of the time it was better to have chosen variable over fixed.

The reason for this is the premium banks charge on fixed mortgages. For a bank to guarantee a rate for 5, 10 or 25 years, it's taking a risk that rates will rise during that time, resulting in the bank losing money. To reduce this risk, the bank charges a little more for a fixed rate. Since that risk doesn't exist with a variable mortgage, the rate is lower.

Having said this, there are other factors to consider. Currently, the difference between fixed and variable rates is very small. At the same time, interest rates are at historic lows. Thanks to all the government stimulus spending, inflation is expected to rise in the next year, therefore interest rates will rise too. So since a fixed rate doesn't cost much extra right now and guarantees a historically low rate over the long term, many people believe it's the right choice for the times.

However, the only way to know for sure is to have an analysis done of your financial situation. If you don't have much equity, are you worried about your job and can't afford to have your mortgage payments rise, a fixed rate may be best. On the other hand, if you have lots of assets, stable income and can live with some rate fluctuation, you may do better with variable--especially since you can lock into a fixed mortgage as soon as rates start rising. As your local mortgage expert, I'd be happy to perform a free mortgage analysis to help you with this important decision. Call me today!

Mortgage Rates still at an all time low, take advantage & make use of real estate to boost your finances!

2010-06-09 | 15:30:00

Hans Wagner

Investopedia.com Published on Tuesday, Jun. 08, 2010 1:44PM EDT Last updated on Wednesday, Jun. 09, 2010 7:27AM EDT

It's a buyer's market in real estate, and mortgage rates are at an all-time low. Maybe you're thinking of diving into the real estate market, or maybe you already own a home or land. Wondering how you can get the most of it? Here are some unexpected ways you can use real estate to boost your finances.

In Pictures: 5 Simple Ways To Invest In Real Estate

1. Multi-Family Dwelling

When you think of a roommate, you're probably having flashbacks to your college days - but think again. Renting a portion of your home can bring in big bucks, and may even allow you to live in your home for free once you factor in your rental income. Retirees and single professionals could benefit in a big way by splitting housing costs, but even families with unused rooms or basements could profit from having a tenant.

If you're buying a home, look for properties with finished basements, mother-in-law suites or two master baths, a common feature in many newer homes. Consider adding a kitchenette and a private entrance, which can be done with a small investment, to give your tenant their own space. (Learn more in Tips For The Prospective Landlord.)

2. Home Business

Real estate can open doors if you're interested in owning your own business. Auto mechanics, hair dressers and even those with a green thumb growing produce in the backyard can use their home as a place of business. Just be sure to check any zoning laws or homeowners' association rules before hanging out your shingles.

If you're working in an office, owning real estate can give you a chance to work from home, and even take a tax deduction. Talk to your boss; you may find telecommuting some or all of the time is your way to get the most out of your real estate dollar.

3. Storage

Your garage or unused basement can make a great storage area, for your stuff or someone else's. If you find you have the room, consider placing an ad to rent out your storage space for extra income. Check your local storage providers for the going rate, so you can offer your space at a discount. Make sure you draw up a contractual agreement before renting the space, so you're not liable for damages or claims.

4. Parking

That parking space that comes with your apartment is premium real estate. If you're not using your space, rent it out for a monthly fee. Likewise, if you own acreage, consider renting parking spots to RV owners or even campers. Just be sure you're in compliance with any local or homeowners association regulations, and you'll be adding to your bottom line with very little effort.

5. Vacation Rental

How about renting out your property as a vacation home? If you travel for long periods of time, or if you're just looking to get income from a second home or other empty property, vacation renting can bring in big money. If you're looking for a cheap vacation, look at swapping homes with someone as a way to get free lodging at a different location; there are many websites where you can connect to others looking to trade places for a few weeks. Just make sure you know what obligations and risks you're committing to before you sign up. (Learn more in Vacation Home Or Income-Producing Investment?)

6. Collateral

Real estate can be used as collateral in loans of all kinds, which will give you a better interest rate than an unsecured loan. If you have equity in your property, look at home equity lines of credit (HELOC) at your bank - just be sure you understand the rates and terms. Disclose any liens held on your property when you discuss loan options with your banker.

7. Long-Term Investing

Recent price drops have made many investors think twice about real estate holdings. Real estate isn't very liquid, meaning it's hard to convert it to cash in a hurry, and the risks of price fluctuations are real. But there are many opportunities when investing in real estate today; prices and interest rates are at historic lows, and there are even tax incentives to aid homebuyers, making real estate a great investment - as long as you're able to hang on for the long term. Live in your home or rent it out and you'll find real estate to be a smart long-term investment with various uses. (Learn what to avoid in 5 Mistakes Real Estate Investors Should Avoid.)

8. Tax Shelter

Nobody likes to pay more taxes than required, which is why investing in real estate is a great way to lower your tax liability. Mortgage interest, closing costs and property taxes could be deducted from your income - check with your tax advisor on ways you can benefit from real estate holdings.

The Bottom Line

Investing in real estate can come with big financial benefits, if you're willing to think outside the box. With mortgage rates still at all-time lows, and housing prices still depressed, now may be a great time to invest in real estate.

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