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RBC lowers fixed mortgage rates 2:15
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RBC has cut two-, three, four- and five-year fixed mortgage rates by 10 basis points after a slide in Canadian bond yields.
Other Canadian banks will be watching the change and could move Monday to follow.
RBC posted the new rates over the weekend on its website. RBC’s discounted five-year fixed rate is now 3.69 per cent, though it may discount that rate for preferred customers.
Five-year fixed mortgage rates rose industry-wide for much of 2013 with an uptick in August helping to cool the overheated housing market.
The five-year rate is an important measure because it is the rate used to qualify borrowers for CMHC financing and for variable and other fixed-rate terms.
The new rate reflects the lowering of Canadian bond yields by 26 basis points in January, which mirrors the slide in yields on U.S. bonds. Bank borrowing costs rest in part on bond yields.
The Bank of Canada has not changed its key overnight lending rates to the banks – it will announce its latest decision on interest rates on Wednesday.
Bond yields rose when the U.S. Federal Reserve decided in December to taper its bond-buying program to $75-billion US a month, but the market has since absorbed the change. However, further Fed tapering or changes in the U.S. economic outlook could lead to fluctuation in the bond markets later this year.
The small change in rates won’t have much impact on home buyers at a time when rates are so low, says one mortgage broker.
“From a mortgage broker’s perspective and probably from a lot of homeowners’ perspective, the real question is not necessarily interest rates,” said Jason Scott of The Mortgage Group in Edmonton.
“It’s got more to do with what the finance minister and the department of finance will do vis-a-vis making it harder to qualify for a mortgage if they don’t like the fact that rates are low and they’re concerned about a possible housing bubble.”
Finance Minister Jim Flaherty has expressed concern at Canada’srapidly rising housing prices and has taken a series of measures over the last two years to cool them, including demanding higher downpayments and limiting most mortgage terms to 25 years.
People walk past homes for sale in Oakville, Ont., in this file photo. The IMF says CMHC mortgage insurance exposes the government to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital. (The Canadian Press/Nathan Denette)
Further measures should be considered to encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.
International Monetary Fund
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The International Monetary Fund says Ottawa should consider phasing out insuring home mortgages through Canada Mortgage and Housing Corp.
The advice is contained in the IMF’s latest economic report card on Canada, which projects modest economic growth of 2.25 percent for the country next year.
Such a recommendation, surprising from an international financial organization, appears to side with Finance Minister Jim Flaherty, who has recently questioned whether the federal government should be in the business of insuring higher-risk mortgages at all.
Some analysts have credited the system for providing much-needed confidence in Canada’s housing sector during the 2008–09 crisis, which many believe was sparked by a crisis in the U.S. mortgage market.
The IMF concedes that the current system has its advantages for stability. But it says it also exposes the government, or taxpayers, to financial system risks and might distort the market as a whole in favour of mortgages over more productive uses of capital.
“We think banks lend too much to mortgages and too little to small and medium enterprises,” Roberto Cardarelli, the IMF mission chief for Canada, told reporters in a briefing in Toronto.
“We suspect the fact that banks may benefit from government-backed insurance on mortgages … it sort of makes it easier for banks to do mortgages than other kinds of lending which, presumably, we think, is going to be more useful for the real economy.”
CIBC deputy chief economist Benjamin Tal says he believes the advice may be appropriate for the U.S., particularly prior to the crisis, but not necessarily for Canada, where the mortgage securitization market is a relatively small slice of the financial pie. CMHC can carry a maximum of $600 billion mortgage loan insurance on its books.
“In this case size matters,” he said. “It is true when securitization dominates the market it is not a very healthy thing, but when it is part of a normally functioning market, it actually helps the economy” by contributing to low borrowing rates and liquidity.
The Washington-based financial institution said further measures should be considered to “encourage appropriate risk retention by private sector and increase the market share of private mortgage insurers.”
It cautioned, however, that if any structural changes are made, they should be gradual to avoid unintended consequences.
The IMF report, released Wednesday, forecasts that Canada’s economy as a whole will start benefiting next year from a pickup in the U.S. economy, leading to greater demand for Canadian exports and renewed business investment.
In essence, the scenario is identical to the one predicted by the Bank of Canada, which also sees growth rising from the current 1.6 percent level to 2.3 next year.
A slightly more positive estimate was issued Wednesday by the Ottawa-based Conference Board of Canada, which is projecting Canadian real GDP will grow 1.8 percent in 2013, 2.4 percent in 2014, and 2.6 percent in 2015—assuming strong growth in the United States.
The Bank of Canada forecast holds that the risks are balanced—meaning there is as much chance the projected growth rate will be higher as lower.
But the IMF warns, however, that the risks to its outlook are primarily on the downside. The main reason, it says, is that it might be wrong about the U.S. economy rebounding in 2014.
“Renewed political standoff (in the United States) over spending appropriations and the debt ceiling and a faster-than-expected increase in long-term rates in the context of exit from quantitative easing could negatively affect the U.S. recovery and hence demand for Canadian exports,” the IMF said.
“Protracted weakness in the euro area economic recovery and lower-than-anticipated growth in emerging markets would also hurt the prospects for Canada’s exports, including through lower commodity prices,” it added.
On the domestic front, the IMF said the long period of low productivity growth and strong Canadian dollar may have left a deeper dent in Canada’s export potential, especially in the traditional manufacturing base, limiting the economy’s ability to benefit from the projected strengthening in external demand.
Cardarelli stressed the importance of investing in the energy sector, an industry that he said would have a significant impact on the organization’s economic forecasts in the future.
“We really feel that the system is stressed in terms of the transportation capacity—the ability of moving these resources out of Alberta, British Columbia, and Saskatchewan,” he said at a news conference in Toronto.
Among other things, the IMF recommends that Canada’s central bank hold off raising interest rates until there are firmer signs of a sustained transition from household spending to exports and investment, something bank governor Stephen Poloz has signalled he intends to do.
And it warns the federal government that it need not be so fixated on balancing the federal budget in 2015 if there is no meaningful pickup in economic activity.
That is likely to fall on deaf ears, however. Finance Minister Jim Flaherty said this week he is confident he will eliminate the deficit in 2015 and bring in surpluses after that.
With files from The Canadian Press