October 2008 Mortgage Newsletter
Greetings to all and a warm Welcome to New Subscribers.
In this time of economic volatility we are all certainly being put to the test, so many questions, so much speculation. We are seeing significantly tighter rules from our lenders these days tempered with the “Bank of Canada” issuing lower interest rates - this creates a borrowing landscape many of us have never seen before. At CMTA, we have discovered this current environment offers many opportunities and we have devised creative ways for our clients to continue on their success paths without hesitation. Contact us to learn more about "adjusting to this climate”.
Bank of Canada warns of slumping economy, cuts interest rate one-quarter point
OTTAWA - The Bank of Canada trimmed its trendsetting interest rate another quarter-point Tuesday, saying Canada needs the stimulus to ward off the headwinds from a United States already in recession and a global economy heading there.
The move, following a half-point reduction two weeks ago, drops the bank’s overnight rate to 2.25 per cent, just slightly above the two per cent level it reached four years ago. And the bank hinted that it may cut further at the next scheduled announcement in December.
The decision may be seen as somewhat disappointing by markets as most economists had recommended a reduction of half a point.
The more moderate cut, however, may make it easier for chartered banks to follow through and pass on the lower rate to customers.
When the central bank cut by half a point on Oct. 8, banks initially balked at dropping their prime rate by the full amount until the federal government injected more liquidity into the system by buying up mortgages.
Central bank governor Mark Carney said Tuesday’s move was needed because economic storm clouds are gathering at Canada’s border.
Citing a “profound impact” from the global financial crisis, a global economy heading into a mild recession and the U.S. already in recession, along with sharply falling commodity prices, the bank’s statement said the outlook for growth and inflation is “more uncertain than usual.”
The central bank made no effort to sugar-coat the situation, saying before even the U.S. has officially declared it that the American economy is in recession.
And Canada will just barely skirt one if the bank’s drastically revised outlook is accurate.
The central bank now says Canada’s economy will advance by only 0.6 per cent this year and next year, before recovering to a 3.4 per cent growth rate in 2010.
“The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports,” the bank stated.
“Lower commodity prices will also dampen the outlook, working through a deterioration in Canada’s terms of trade to moderate domestic demand growth.”
As well, the bank said “tightening in Canadian credit conditions in recent weeks will restrain business and housing investment.”
Working in favour of the economy is the recent slide in the value of the Canadian dollar, which will make exporters more competitive in the global market, and efforts by major economies to bail out their banking sectors and stabilize financial systems.
As recently as July, the bank forecast the economy would advance by one per cent this year and 2.3 per cent next.
The Bank of Canada’s principal objective in adjusting interest rates is to keep Canada’s inflation rate within a one-to-three per cent range, and as close to the two per cent target as possible.
It now says inflation has ceased to be a significant problem.
Although the consumer price index remains slightly elevated above three per cent, the bank said excess supply will bring price increases down to about one per cent by the middle of 2009 before returning to close to the target by the end of 2010.
“In line with the new outlook, some further monetary stimulus will likely be required to achieve the two per cent inflation target over the medium term,” the bank said.
It’s next scheduled rate decision will be made on Dec. 9.
Text of the Bank of Canada’s announcement as it cut its policy interest rate by a quarter-point to 2.25 per cent:
Three major interrelated developments are having a profound impact on the Canadian economy. First, the intensification of the global financial crisis has led to severe strains in financial markets. The associated need for the global banking sector to continue to reduce leverage will restrain growth for some time. Second, the global economy appears to be heading into a mild recession, led by a U.S. economy already in recession. Third, there have been sharp declines in many commodity prices. The outlook for growth and inflation in Canada is now more uncertain than usual.
Consistent with the G7 Plan of Action, major economies have announced extraordinary measures to stabilize their financial systems. These initiatives will be pivotal to resuming the flow of credit to support global economic growth. Canada’s economy and strong financial system will benefit directly from these actions. The weaker outlook for global demand will increase the drag on the Canadian economy coming from exports. Lower commodity prices will also dampen the outlook, working through a deterioration in Canada’s terms of trade to moderate domestic demand growth. The marked tightening in Canadian credit conditions in recent weeks will restrain business and housing investment. The Bank expects growth to be sluggish through the first quarter of next year, then to pick up over the rest of 2009 and to accelerate to above-potential growth in 2010 supported by improving credit conditions, the lagged effects of monetary policy actions and stronger global growth. The recent sizable depreciation of the Canadian dollar will also provide an important offset to the effects of weaker global demand and lower commodity prices. Overall, the Bank projects average annual growth in real GDP of 0.6 per cent in both 2008 and 2009, and 3.4 per cent in 2010.
With excess supply projected to build throughout 2009 and lower assumed energy prices, inflationary pressures will ease significantly relative to the projection in the July Monetary Policy Report Update. Core inflation is now projected to remain below 2 per cent until the end of 2010. Total CPI inflation should peak during the third quarter of 2008, fall below 1 per cent in the middle of 2009, and then return to the 2 per cent target by the end of 2010.
In the face of diminished inflationary pressures, the Bank of Canada lowered its policy interest rate by 50 basis points on 8 October, acting in concert with other major central banks. This extraordinary move, combined with today’s announcement, brings the cumulative reduction in our target for the overnight rate to 75 basis points since the Bank’s last fixed announcement date. These actions provide timely and significant support to the Canadian economy. The cumulative reduction in the Bank’s policy rate since last December is now 225 basis points.
In line with the new outlook, some further monetary stimulus will likely be required to achieve the 2 per cent inflation target over the medium term. The evolution of the financial crisis, its impact on the global economy and the timing of the effects of the various extraordinary measures being taken to address it pose significant risks to the projection on both the upside and the downside.
© The Canadian Press, 2008
Debt and bonds to fund Ottawa’s mortgage buy
Q. Why is the government buying mortgages?
A. The credit crisis is making it difficult for banks to find funding to provide credit, so the government is buying bank-held mortgages as a way to inject needed cash into the banks. This will help financial institutions raise funds to continue extending credit to consumers, businesses and homebuyers, the government says.
Q. How much will this cost the taxpayer?
A. Ottawa says the move “comes at no fiscal cost to the taxpayer,” and says the mortgages will provide the government a rate of return above its cost of borrowing. The mortgages being purchased are guaranteed through government-backed mortgage insurance. There is always risk, however, that mortgages will not all be paid by the homeowners.
Q. How will the government pay for the purchases of mortgages?
A. The purchase of mortgages will increase the government’s debt since the government will issue Treasury bills (short-term debt instruments) and bonds to the public to pay for the purchase of the mortgages. The direct cost of the mortgage purchases does not affect the government’s budgetary surplus or deficit.
Q. Is this a bailout of the banks?
A. Finance Minister Jim Flaherty insists it’s not a bailout, since the government is buying “high-quality assets,” and not investing in shares of the banks. He says Canada’s housing and mortgage system is “sound,” and the move to buy mortgages is an “efficient and cost-effective” way to add liquidity to the banking systemat a time of turmoil in financial markets.
Q. What are the banks doing in return for this government support?
A. Many Canadians were furious that the big banks this week cut their prime lending rates by only a quarter point after the Bank of Canada cut its key interest rate by a half point. After the mortgage move was announced yesterday, some of Canada’s leading banks cut their prime rate by a further quarter point, while others cut by only 15 basis points.
(October 21, 2008)
Today’s Canadian Mortgage Team Alberta Interest Rates on First Mortgages are as follows:
Rates are subject to change without notice.
| Description | Canadian Mortgage Rate |
|---|---|
| 6 Month Closed | 6.35% |
| 1 Year Closed | 4.35% |
| 2 Year Closed | 5.50% |
| 3 Year Closed | 5.75% |
| 4 Year Closed | 5.80% |
| 5 Year Closed | 5.84% |
| 7 Year Closed | 6.40% |
| 10 Year Closed | 6.65% |
| 15 Year Closed | 6.85% |
| 25 Year Closed | 6.95% |
| Prime | 4.00% |
I trust this information will come in handy and help you to stay informed.
I will continue to update you on the Market and where things are going.
One Small Saving on your Interest Rate will be worth Thousands! in the Long Term.
Feel Free to call anytime…
Regards,
Dan Heon
Canadian Mortgage Team Alberta.
Phone: Calgary 403-257-1801
Phone: Edmonton 780-701-7100
Fax: 403-206-7622
Toll Free: 1-888-281-0111
Email: dan@danheon.com
The best way to thank your Mortgage Broker is tell others about your Savings and Service.
