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August 2004

• Interest rate trends
• When you can't decide whether to fix or float
• In the news

Interest Rate Trends

Residential interest rates were slightly down on news of a disappointing US employment numbers.  Employment figures released in July of 115,000 was significantly lower than the 250,000 most economists were predicting - an indication that the US economic growth may be slowing down.

 

Prime @ 3.75%

Term	Jun 18	June 25	July 2	July 9	July 16	July 23	July 30
3 year	4.85%	4.85%	4.85%	4.75%	4.75%	4.75%	4.75%
5 year	5.40%	5.40%	5.40%	5.20%	5.20%	5.20%	5.25%
10 year	6.20%	6.20%	6.20%	6.00%	6.00%	5.99%	5.99%

Table shows the best discounted residential mortgage rates for 3, 5 and 10 yr closed fixed rate mortgages

For a longer term view, click here to see the 3, 5 & 10 year best residential rate since September 2003 (updated monthly)

Click to view other relevant graphs

 

1) Graph of 5 year residential mortgage rate and prime rate since 1951

2) Graph of 5 year posted rate since January 2000

3) Graph comparing the 5 year mortgage rate versus variable at prime - 0.75%

When you can't decide whether to fix or to float

I often get the question from home buyers - Should I get a fixed rate or variable rate mortgage? In most cases, our value system dictates the answer to this question.  What is more important to you? Security or savings - Is the security of a constant payment stream more important to you than lowering your mortgage payments?  On a $200,000 mortgage, a variable rate mortgage could save you as much as $263/month.

For those who are still unsure, here are two options you should consider:

1) Vancity's Homeprime Capped variable rate mortgage - This is a 5 year variable rate mortgage priced at prime less 0.25% (currently at 3.5%) with a cap of 6.29%.   With a capped rate mortgage, there is an upper limit on the interest rate

2) Scotia STEP Mortgage - (applicable mainly for conventional mortgages) You can have up to 3 different types of mortgages.  For example, you could have a 5 yr term, a 10 year term and a variable rate mortgage under the STEP program.  The result is that you are able to hedge you risks.   

In the News (excerpts from recent press releases)

1) Fed Hikes Key Rate a Quarter Point (Toronto Star, July 1, 2004)  - Alan Greenspan, encouraged by a U.S. economy that is finally creating jobs yesterday took the first step on what promises to be a long road ahead of interest-rate hikes. The Federal Reserve Board raised its trend-setting funds rate a quarter point, to 1.25 per cent, the first increase in four years. Forecasters expect the fed funds rate will reach 4 per cent to 4.5
per cent by the end of 2005. In Canada, a report showing economic growth in April was weaker than expected reinforced sentiments the Bank of Canada will wait until at least September to start raising this country's benchmark overnight lending rateClick here to read the full article.

2) Bank of Canada Sees Interest Rates Rising (Reuters, July 22, 2004) - Canadian interest rates are poised to rise as the Bank of Canada reins in faster than expected growth and cracks down on inflation, the central bank said on Thursday. Click here to read more.

3) The Macro Picture & Implications for the Housing Market (Benjamin Tal, CIBC World Markets, July 6, 2004) - Developments south of the border will play by far the largest role in determining the destiny of the Canadian economy in the coming twelve months. Clearly we are at a turning point in the US market. Interest rates started an upward trend, inflation is on the rise and the US labour market is starting to move in the right direction following the worst job-drought in generations. Given this environment, the market is now expecting the Fed to raise the Fed funds rate from the current 1.25% to just under 4% by the end of 2005. Click here to read a thorough analysis of the housing market.

4) BC Building Boom Continues (Canada.com, July 8, 2004) - BC building permits are the highest ever, rising to a record $3.1 Billion over the first five months of this year, and defying a national trend that could be showing the beginning of the end of the country's housing boom. Click here to read more.

5) Bungalow Prices Come Out Of Cellar, Vancouver Most Costly (Canada.com, July 7, 2004) - In Canada's most expensive real estate market, buyers can be forgiven from asking themselves if they are purchasing a place to live or an heirloom. Driven by low mortgage rates and a strengthening economy, the average price of a detached bungalow -- known in previous times as a "starter home" -- is $462,000, according to a survey by Royal Lepage Real Estate Services .   Click here to read more.