Homebuyers can’t complain

Well it’s been a while since I spoke of mortgage interest rates, and mostly because that song has played too many times, so it’s time for an update.

As always, there’s two different interest rates, the fixed rate which is set by the bond market and the prime rate which is set by the government.

The latter hasn’t changed in well over a year, and likely isn’t going to change anytime soon either, well, so the government says, but the factors that they set the rates on are in positive territory – job growth, market strength, even the weaker economies in Europe are coming around. So the prime rate is sticking at the 3% mark for now.

To discuss the fixed rates, well one has to discuss the global market.

First, last month we saw the second largest job growth rate in Canada, ever! Our unemployment rate dropped to 7.10% from 7.23%, with a gain in 95,000 new jobs being created. Our average unemployment rate since 1966 has been 7.76%.

To add to that the U.S. economy has seen some of its strongest employment growth since 2006, and its housing market had some of the largest gains since that same period as well.

Simply put, more jobs equals more confident consumers. More confident consumers then equates to higher spending. Higher spending then means higher profits, higher profits means economic growth. All of this growth will mean that the stock market will grow and when that happens more large investors now take their money from the safe and secure bond market back into the equity markets, thus meaning that the bond market makers now have to increase their yield to attract those investors to stay invested in their funds.

So with the bond market prices increasing (where large institutional investors borrow their funds for mortgages) these pricing increases are then passed onto the consumer in the mortgage market.

What does this mean to you? Well all this positive news came to a head last Monday when the employment figures came out. So since then, the mortgage lenders have had to increase their mortgage interest rate pricing as it costs them more to buy their money.

In dollars and cents terms, pricing on average has gone up 0.10-0.15%, this means that a lender that had a 2.84% special is now pricing between 2.94% and 2.99% (NOTE: these are for “live deal” specials that lenders offer and NOT on pre-approvals). The pricing for pre-approvals has gone up to an average of 3.09%-3.19% depending on the lender and their pricing requirements.

In the long run, these interest rates are so low, some clients of mine are calling it free money. You have to realize that the average discounted wholesale interest rate (as quoted above) for the 25 years previous to the 2008 meltdown was 5.85%.

As I’ve mentioned before, these interest rates are so low, that when you come to renew your mortgage at the average five-year fixed interest rate five years from now, your payments will go up 25%. It is not surprising to see the reactions to the payment increase that’s looming when I educate my clients but as long as they prepare themselves, they will be fine. If they don’t heed the advice, they are in for payment shock.

Needless to say, rates have crept up, but until rates hit the 6% level, Canadians have absolutely nothing to complain about.

Jean-Guy Turcotte is an accredited mortgage professional with Dominion Lending Centres – Regional Mortgage Group.

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