Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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If your mortgage renewal is coming up in near future but not that close that you can get a rate hold then this may not be a good time for your future financial plans. Generally most of the lenders offer decent rate for four months (120 days) rate hold. If in case the existing term is expiring in five or six months then the present situation is not the best to be in.

Not that you can do much about it but it is always better to monitor the situation and you can always break the existing term a couple of months earlier. Obviously you have to pay penalty. But a higher saving in the future full term may cover the pain from the penalty.

1.     Bond yields:

The First and foremost indicator of mortgage rate trend is the bond yield. If the share market is doing well and future of national GDP looks good then there are reasons to be worried – about the bond market.

Bond market is for safe investment. When the other investment instruments are unpredictable – the investors seek safer places. As market stabilizes and stocks start to yield reasonably well then bonds become less attractive.

Mortgages are a type of investment. They are securitized and backed by assets. Most of the mortgage fundings come from bond market – backed by public or private investors.  When bond prices fall (yields go up) then it is obvious you have to pay more return to the investors (interest) to make the bonds attractive again.

2.     Inflation:

Money is borrowed into existence. True, but at the same time remember – interest is not produced by anyone. It gets added to the system without any real product to back it up.

An economy needs growth to cover interest and inflation (and many more). When growth and interest both are at their lows – inflation is not a serious threat. Not only those two but also velocity of money needs to pick up some wind on their sails to push inflation.

Once it gains momentum – BoC will be forced to withdraw its financial aids partially. Thus prime rate will go up. Once prime rate goes up then it is a different story for the variable mortgages.

3.     Regulation:

Government or Authorities like OSFI or even CMHC (under OSFI) can bring significant changes to the mortgage market. By simply changing amortization period or down payment or qualifying factors – they can alter the course of the mortgage market.

The effects of those changes can have positive or negative impact on the mortgage rates.

If the government decide to increase the down payment requirement then a lot of people may simply decide to wait till they save enough. Some may go to a B or Alt-A lender to arrange the money. It may force the lenders to reduce interest rates to get rid of their extra cash (not really extra – remember cash reserve ratio?).

This low interest rate competition will impact the lenders negatively. Less profit margins means cost cutting. More jobs will be lost and branches will be closed.

4.     Canadian Economy:

The economy is related to the first two points directly. An outperforming economy will push the bonds lower and BoC will care less about raising rates.

When the economy is doing poorly then the central bank will be very cautious to raise rates. But when the future looks rosy then the bank will try to reduce its exposure. So, even without any initiating event from inflation it may decide to precede the rate hikes.

Canadian economy is also directly related to financial wellbeing of Canadians. When Canadians are doing well then the chances are less that they will pay much attention to a small rate hike. For that to happen – employment numbers need to improve.

5.     Global Market:

Well, this is more complicated but has direct impact on bond yields. Canadian bonds are seen as safer than many other countries. So, when there are financial or political problem in some part of the globe then the investors try to move their funds away to safer places.

When that happens – the bond demand goes up along with their prices. So, yields drop and your mortgage rates too.

6.     Housing:

Last but not the least- Housing. Mortgage lending exists because of housing demand. If housing tumbles or otherwise – everything can experience the impact.

These are some of many other factors that influence the mortgage rates and it future. As an example – should we consider the political situation at home as another factor? May be not.