Monthly Review of Interest Rate Forecasts from the Major Banks

On April 21, 2009, the Bank of Canada (BoC) announced their last rate drop (see the BoC rate announcement).  This brought down the overnight rate to 1/4% which is the lowest the BoC is able to go.   In that announcement, the Bank committed to hold the rate until “the end of the second quarter of 2010″.

It was no surprise that the forecasts from the major lenders were in line with the Bank of Canada’s announcement

• BMO expects interest rates to start rebounding in 3rd quarter of 2010 - BMO Economic Research Focus dated April 24, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/4% until the 3rd quarter of 2010 – CIBC World Markets April 28, 2009
• RBC forecasts the BoC staying at its current level of 1/4% until the 3rd Quarter of 2010 – RBC Financial Market Forecast dated April 3, 2009
• TD Bank did not provide a forecast – Read TD Economics Commentary dated April 21, 2009 of the BoC announcement to maintain the current overnight rate at 1/4%

Is it important to work with a mortgage professional that is up-to-date on interest rate trends? Absolutely!  The interest on your mortgage will be the biggest expense in your home purchase.  You’ll need a mortgage broker that thoroughly understands interest rate trends and how this affects your choice of your mortgage programme.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .

Genworth Tightens Credit Requirements on All Products

On April 7, 2009, Genworth Financial advised lenders of changes in their mortgage insurance guidelines, making it more difficult to obtain mortgage insurance.

• The New Recommended Credit Scores For The Cash-Out Refinance Program Are As Follows:
  • 90.01-95% LTV: 700 (Increased from 650)
  • 85.01-90% LTV: 660 (Increased from 600)
• The Recommended Credit Scores For High-Rise (4+ Floors) Condominiums Are As Follows:
  • 90.01-95% LTV: 700 (No previous minimum)
  • 85.01-90% LTV: 660 (No previous minimum)
• The New Recommended Maximum GDS/TDS Ratio is 35/42% For All Credit Scores and All Products (previously 44% for credit scores over 680 and 35/42% for credit scores below 680)
• Investment Property (Rentals) And CreditAssist Are No Longer Eligible For High-Ratio Mortgage Insurance
• The New Maximum Loan-to-value and Recommended Credit Scores For The Business For Self (Alt. A) Product Are As Follows (Previous Credit Score Requirements In Brackets):
  • up to 90% LTV – 700 (previously at 650, only for purchases, not for refinances)
  • up to 85% LTV – 680 (previously at 650, purchases and refinances allowed)

The other two mortgage insurance companies, CMHC and AIG, and they have not announced any changes so far.  However, it is not inconceivable that changes will be forthcoming.

It is important that the bank or lender you are applying with has the ability to use either of the three mortgage insurance companies.   If you are not sure, you should go to a mortgage broker since we have access to all three insurance firms.  This gives you the most flexibility and options since each insurance company has its own guidelines which may not meet your needs.

Monthly Review of Interest Rate Forecasts from the Major Banks

On March 3, 2009, the Bank of Canada (BoC) announced a rate drop which brought the overnight rate down to 1/2%.   At the time, it was the consensus that this was going to be the last rate reduction until the economy recovers in 2010.  In that announcement, however, the BoC hinted at a possibility of one more rate drop.   The Bank stated that  the overnight rate can be expected to remain at this level “or lower “.  The “or lower”  part of the press release leaves open the option to reduce the overnight rate one last time.

Here is a summary of what the banks are forecasting:

• BMO favors one more rate reduction to 1/4 percent in April 2009 – BMO Capital Markets Rate Scenario dated March 4, 2009
• CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/2% -  CIBC World Markets Market Call dated March 2, 2009
• RBC forecasts the BoC staying at its current level of 1/2% – RBC Financial Market Forecast dated Mar 12, 2009
• Scotia Bank and TD Bank did not provide an interest rate forecast in March.  TD prepared a report entitled “The Perils of Ultra-Low Rates: The Canada Case“.  While there are precedents from other countries (e.g., Japan’s interest rate at 0.10%, US at 0.00-0.25%), problems could arise when interest rates approach close to zero.  There are implications for investors who will be earning close to nothing when investing in the money markets.  There are also implications for bank financing that is tied to the prime rate.

Stay up-to-date on interest rates and home buying trends by signing up for my e-newsletter at www.bcmortgage.ca/opt_in.htm .