Canadian Mortgage Rates and the World Financial Market
Canadian bankers are, by nature, a conservative lot. This is partly due to the mandated procedures and policies they are given by The Office of the Superintendent of Financial Institutions (OSFI) in Ottawa. The OSFI, reporting directly to the Federal Government’s Minister of Finance, has the responsibility to grant (and also terminate) Financial Institution Operating Charters. As a result, Financial Institutions always seek to have a positive relationship with OSFI, and in turn OSFI always closely monitors the operational integrity of our Federally Chartered Canadian Financial Instructions.
To ensure the soundness of Canadian Federal Financial Institutions (FI), OSFI will take into consideration, among other things: adherence to strict Tier 1 and Tier 2 equity capital requirements; portfolio delinquency rations; asset quality; asset mix requirements; and firm asset and liability matching reporting requirements. An FI is permitted to, with respect to the firm’s asset and liability matching report, ‘mismatch’ up to a maximum of 15% in any given quarter for any given term. This leeway, together with an accurate forecast of interest rate trends, gives FIs the ability to pick up additional interest by deliberately mismatching their assets to their liabilities. FIs will engage in this practice from time to time in an attempt to increase the investment return in their lending portfolio.
Listening to Jim Flaherty, Minister of Finance, several months ago would have left one confident that Canadian interest rates were scheduled to start a slow but steady increase from their current historic lows. In fact, many respected economists were projecting a July or August start date for the anticipated hikes. Due to the ever-changing global financial world we find ourselves a part of, this rate increase never occurred. It would seem that the Canadian economy is no longer insulated from what happens in other parts of the world. In addition to budget problems and unemployment issues that have threatened the fragile economic recovery process in the United States, the debt problems in Europe are mounting. The Global economy’s problems are manifesting in the Canadian economy’s slowing growth and lower inflationary pressures. Accordingly, the Bank of Canada has decided to delay raising Canadian interest rates.
As a result of this revised interest rate forecast, some of the FIs who lend via mortgages have been caught mismatched and are now aggressively lending in an effort to reduce the risk of shrinking interest available rate spreads (interest rate spread is the difference between what an FI pays for its cost of funds and the amount it charges while lending such funds). What we have been seeing recently is very aggressive competition between lenders when it comes to fixed term mortgages. This, together with the industry’s increase in the cost of variable rate mortgages, is helping make fixed rate, longer term mortgages appear more attractive to the mortgage consumer.
We are certainly living in interesting times, and in an economy that is, without question, a true part of the global economy. Yes, economic trends will continue to be volatile. Yes, the ‘big picture’ we must consider before making financial decisions just got quite a bit bigger.
“In investing, as in politics, the easy plausible notion is often misleading.” – John Train, The Craft of Investing, 1994
Paul E. Croy
Pulling a Rabbit Out of the Hat
Lately, many people have questioned the decision by the Governor of the Bank of Canada to raise interest rates. The truth is the Governor has simply been doing what is required to work a little Made-in-Canada economic magic. What the Bank of Canada is doing is an act of balancing today’s need for economic stimulus against the long term requirement for both inflationary and monitory stability.
Over the years, we have seen both hot and cool real estate markets and heard the terms buyer’s market and seller’s market. It is interesting to note, however, that since the three recent increases in the bank rate, residential mortgage rates have been declining. It is now very much a buyer’s market and five year mortgage rates are at a historical low.
It is however, the opinion of more than just a few that the recent moves designed to crack down on what has been described as reckless real estate speculation may have swung the regulatory pendulum just a wee bit too far. Out here on the West Coast we are also dealing with the effects of the recent imposition of harmonized sales tax and a provincial government that is suffering from a financial budget hangover of Olympic proportions.
Making it harder for first time buyers to qualify for mortgages and increasing the required down payment for investors purchasing rental properties have contributed to a cooling of the real estate market. Perhaps, by its recent actions, the Bank of Canada may have pulled a rabbit out of the hat, thereby reducing a need for future interest rate hikes in the short term. We are truly living in interesting times.
Paul E. Croy
Interest Rates on the Rise?
The Bank of Canada has signaled that they do not expect to hold present interest rate levels past the end of June…..
See the March 11, 2010, Business Week article, Canada January New Home Prices Rise 0.4%, Seventh Straight Gain
We are presently enjoying the lowest interest rates seen since the Korean War, and the only thing we can absolutely count on is that rates will inevitably rise. The ‘experts’ cannot seem to agree on when or by how much, but the varied opinions range upwards to an increase of 2.0% – 2.5% by the end of 2011.
I believe that now is the time to become pro-active and ensure that you take advantage of the present interest rate environment. Do you wish to explore the possibility of ‘renegotiating’ an existing mortgage? Would you like to ‘lock-in’ an interest rate for an upcoming purchase? Does your mortgage ‘mature’ in the next few months? Fixed rate vs. variable rate?
Our mortgage professionals are your best source for mortgage advice and can explain all your available options.
Walt Neufeld
Video: Information about Mortgage Investment Corporations – Fine Print, Dividends & Redeeming Funds
Jeffery Moses discusses the fine print of Mortgage Investment Corporations (MICs). He also talks about how investors redeem their MIC funds and how Great Pacific distributes MIC dividends.
What is a MIC? – Why You Should Know
Mortgage Investment Corporations (MICs) are designed specifically for mortgage lending in Canada. MICs lend to qualified borrowers in a ‘niche’ mortgage market who may be finding traditional mortgage lending is not getting them the results they need. A MIC mortgage portfolio can include everything from small second mortgages on residential property to commercial and development mortgages on new projects.
To many experienced investors it’s a no-brainer to include MICs in their investment portfolio. MICs don’t have the volatility of stock markets and they offer returns that are significantly higher than those from money market products.
Owning shares in a MIC allows investors to participate in a diversified and secured pool of mortgages. The income is either paid out on a regular basis or can be reinvested for growth.
A MIC is the investment that everyone should have in their portfolio because it’s secure and will make you a lot of money. Pretty simple.
Find out more about MICs here.
What We’re Talking About
It’s time somebody started a conversation about Mortgage Investment Corporations (MICs) – so here we are. And while we’re at it, we will also provide a fresh perspective on the topics of economy, real estate, investing and borrowing.
On a weekly basis, we will be responding to and providing our perspective on financial and real estate news and we will begin a discussion about MICs starting with what they are, how they work and how to ensure you are investing in a quality investment, whether it’s a MIC or not.
You will meet the team of Great Pacific over time as we all participate in this discussion. We don’t always agree but that’s part what makes us good at what we do and it does make life just a little more interesting.
By Rory Campbell, Walt Neufeld & Jeff Moses
