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BUTTE, Mont. – Two of the biggest names in business say they see a bright future for the economy. Read more on The Canadian Press via Yahoo! Canada News
New regulations would reduce banking risks
BASEL, Switzerland — Global financial regulators agreed Sunday on new banking rules designed to strengthen bank finances and rein in excessive risk-taking to help prevent another crisis. Read more on The Indianapolis Star
The best rumors have the longest staying power, and the untruths about the connection between Bank of Canada interest rate cuts and mortgage rates is a prime example. Why? Well, though Bank of Canada interest rate cuts do affect the financial industry, they do not affect every segment of the financial sector; some segments are directly affected, others are only indirectly effected, and then there are segments that are directly or indirectly effected depending on the financial product. The mortgage industry falls into that third category.
Shocked? Well, you’re probably not alone. The idea that Bank of Canada discount rate changes cause mortgage rates to change is a common misconception that’s been perpetuated for years. So, let’s set the record straight!
TRUTH: When the Bank of Canada adjusts interest rates, it does affect interest rates of financial products. However, only interest rates for short-term financial products—things like car loans, credit cards, etc.—are directly affected by Bank of Canada interest rate cuts or hikes. Meanwhile, 10, 15, 30, and 40-year fixed mortgage loans are considered long-term financial products. As such, the Bank of Canada’s decisions do not directly influence fixed mortgage rates.
TRUTH: Though Bank of Canada rate cuts have no direct influence on fixed mortgage rates, the Bank of Canada’s decisions do directly sway one type of mortgage loan: Adjustable rate mortgages (ARM), which are also sometimes referred to as variable rate mortgages, IF the ARM is specifically stipulated as being tied to the prime rate.
TRUTH: Fixed mortgage rates are based on mortgage bonds (sometimes called mortgage securities), NOT the 10-year T-bill. Therefore, what actually has a direct effect on a mortgage rate increase or decrease is the buying and selling of mortgage bonds.
TRUTH: Though Bank of Canada rate changes do not have directly influence fixed mortgage rates, they can have a Domino Effect on fixed mortgage rates. How so? Well, the purpose of the Bank of Canada’s rate adjustments is often to increase or decrease consumer spending. For instance, when interest rates are cut, the goal is to increase consumer spending. As a result, investors speculating that the Bank of Canada’s tactic will work pull their money out of the bond markets (which are less volatile, low return investments) and put their money into stocks because they believe they can make greater profits from their investment. When this happens, that can cause mortgage rates to fluctuate. Remember: Mortgage bonds / mortgage securities affect mortgage rates. If money is cashed out from mortgage bonds, rates will increase. Conversely, if the monies are withdrawn from other types of bonds, mortgage rates may dip or they may remain unchanged.
So, what does all of that mean if you’re looking to modify or refinance your mortgage, or if you’re waiting for mortgage rates to change before you apply for a mortgage loan? First, it means that you should keep an ear out for what the Bank of Canada is doing regarding interest rate cuts and spikes ONLY if you’re interested in a variable rate mortgage—which would not be ideal for most consumers in the current economy. However, if you prefer a fixed rate mortgage, it means you can (and should) stop wasting your time tracking the 10-year T-bill and keeping tabs on the Bank of Canada. Instead, keep watch on what’s happening with mortgage bonds so you’ll know when mortgage rates are where you want them!
Mauricio Navarro is the writer and adviser to MortgageRatesInCanada.ca – a comparison website for Canadian mortgage rates. Also, Mauricio is involved as an investor in CompareMortgageQuotes.ca – a website to compare mortgage rates & receive instant mortgage quotes.
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Frederic Miskin, former Federal Reserve Board governor and professor at Columbia University, discussed the importance of keeping mortgage rates low with Andy Serwer, and CNBCs Rick Santeli, and Steve Leisman this morning on Squawk Box this morning. Miskin stressed the importance of keeping the Federal Reserve separate from government intervention, preventing inflation, and preventing the demand for housing from falling even lower. If the treasury dumps debts on markets, this will lead to higher interest rates, which will lead to higher mortgage rates, which will then cause a decrease in demand for both housing and lower housing prices, which can impact the overall financial system, said Mishkin. And while he says it is important for the Federal Reserve to maintain independence, he thinks fiscal policy should be amended in order to keep mortgage rates low. The monetary policy now should keep mortgage rates low, but it cant without help from the federal government, said Mishkin. Video Rating: 4 / 5
