Monthly Review of Interest Rate Forecasts from the Major Banks

The major banks did not release any new interest rate predictions during the month of May.  I could only find forecast tables showing their expectation that the Bank of Canada overnight rate  (which is tied to the Chartered Bank prime rate) will not be rising until mid-2010.

The liquidity crunch seems to be easing.  The pricing for variable rate mortgages has slid down to Prime + 0.60% for some lenders from a high of Prime + 1.0% in October 2008.   The 5 year rate has also come down slightly to 3.79% for standard mortgages (although there are lower rates for “no frills” mortgages).

Here is what the major banks are forecasting.

1. BMO expects interest rates to start rebounding in 3rd quarter of 2010 – BMO Economic Research Focus dated May 22, 2009
2. CIBC World Markets forecasts the BoC to hold the overnight rate at its current level of 1/4%  at least until the June 2010 – CIBC World Markets May 13, 2009
3. RBC forecasts the BoC staying at its current level of 1/4% until the 2rd Quarter of 2010.  After that, RBC is forecasting a 1% increase in interest rates by the end of 2010 – RBC Financial Market Forecast dated May 8, 2009
4. National bank remains the lone dissenter as they expect rates to increase by the 1st Quarter of 2010. Their forecast for 2010 is an average prime rate of 4.25% – National Bank Monthly Economic Monitor dated May 2009
5. I could not find interest rate forecasts for Scotia Bank and TD Bank.

Given the extremely low interest rates today, I am recommending locking-in to a long-term mortgage (at least 5 years). That’s if you have the new variable rate mortgages which are price above prime.  While there is some savings to be had by keeping a variable mortgage for the next 6-8 months, the savings would not be significant.

For those with the “old” variable rate mortgages which were priced below prime (some at 0.90% below prime), it is a harder call.  If you have a couple of more years to go on that mortgage, I would keep that mortgage.  For you, interest rates have to rise by at least 3 percent before you reach the fixed rate mortgage rate.

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 .

Tips for Boosting AffordabilityTips for Boosting Affordability

Lower mortgage rates have meant increased affordability for home buyers.  For first-time buyers looking for a home of their own, there are some ways to further increase mortgage affordability and stretch one’s housing dollar.  Here are some tips to consider:

Know what you can afford. A mortgage pre-approval helps you establish a price range and the maximum mortgage you can reasonably afford.  Many lenders will lock-in a rate for up to 120 days when pre-approving potential borrowers for a mortgage.

Revisit your current debts.  When applying for a mortgage, a lender will look at your total debt service ratio (TDS), or how much of your total income is going towards various types of debts, including car loans, credit cards, and other consumer loans.  A mortgage broker can advise on restructuring your current debt (by increasing the amortization and lowering payments on your car loan, for example), to ensure that your TDS ratio is acceptable to prospective lenders.

Increase the size of your down payment.  Increasing the size of your down payment means a lower monthly payment.  A common way for first time buyers to come up with more cash for a down payment is to make use of the federal Home Buyers’ Plan.  With this Plan, you can now withdraw up to $25,000 each from a registered retirement savings plan (RRSP) without tax penalty to buy or build a qualifying home.  Also, many lenders allow the down payment to come from a properly documented gift, and a borrowed down payment may be possible for some borrowers.