Mortgage interest rates have fallen from the peak they hit this summer, but various economic forecasters predict there are more savings to come. Even without further reductions, a leading mortgage brokerage suggests it might not be wise for homeowners and buyers to lock themselves into a five-year term right away. The welcome relief in interest costs is expected to result from a slowing of the American economy, where a glut of unsold houses threatens to scare the spunk out of debt-ridden consumers.
Jeffrey Rubin, the colourful and emphatic CIBC World Markets economist, told an enormous gathering of financial analysts last week that he expects U.S. central bankers to do whatever is necessary to avoid an economic recession. He predicted the U.S. Federal Reserve Board will start to lower short-term interest rates as early as January, ending an extended period of increases aimed at curbing a rise in consumer prices.
If fears of inflation subside along with the pace of the economy, then long-term rates should fall, too. Where U.S. rates go, Canadian rates would likely follow.
The Bank of Canada would not want to encourage a further rise in our dollar that would bring more pain to manufacturers. Rubin predicts the interest yield on 10-year government bonds will fall by half a percentage point or more, providing a lift to the price of bank and other financial services stocks over the next several months.
If bond yields fall, then mortgage interest rates would soon follow, although not necessary as quickly or as far. "A pragmatic and flexible Federal Reserve Board is likely to limit any contagion effects from a slumping housing market with at least three rate cuts next year," Rubin wrote last month. He noted that, during a slowdown of the U.S. economy in 1995 and early 1996, it only took a similar reduction of interest rates to clear the way for five more years of economic growth.
In Canada, Rubin predicts our central bank will cut short-term rates by as much as a full percentage point next year, twice the half-point rise he predicts for long-term bond interest yields. Major banks have cut their posted mortgage rates from 6.95 per cent for five-year terms in mid-August to 6.6 per cent as of the end of last week.
They have cut their one-year rates from 6.6 per cent to 6.4 per cent. Meanwhile, interest yield on five-year government bonds has fallen nearly 0.6 of a percentage point compared with the 0.35-point reduction in five-year mortgage rates.
That leaves room for further mortgage rate reductions. For that reason alone, Invis, a national chain of mortgage brokers based in Langley, B.C., is urging savvy consumers who need to renew or negotiate a mortgage to be strategic about their choice of mortgage term.
"The spread between mortgage rates and bond rates should be fairly constant over time, but lately this spread has been greater than what is considered normal," the company noted in a recent news release. "If this healthy spread between mortgage rates and bond yields persists, fixed mortgage rates, which have been edging downward in recent weeks, could continue to fall."
Bond yields have risen from the low they hit on Sept. 12, but would still leave room for a further reduction in mortgage rates. And, if Rubin and others are right, there will be further reductions later. "A more sophisticated mortgage consumer who prefers the comfort of a fixed-rate, but doesn't want to miss out on potential savings if rates do continue to fall, just might have a solution," Invis suggests.
They could work with a mortgage broker — hint, hint, nudge, nudge, know who they mean? — to select a variable-rate mortgage that can be converted at any point during the term into a fixed-rate mortgage. The one proviso Invis suggests to consumers is this: Ensure from the outset that the fixed-rate mortgage will be offered at a fully discounted rate, and not just the rate posted on the door or offered to renewal customers to see if they will bite.
At the time Invis did its analysis, consumers who followed the strategy stood to save as much as 0.4 of a percentage point — enough to save $3,848 in interest over five years if you happened to have a $200,000 mortgage amortized over 25 years."Though the potential for significant interest savings is strong, it is important to note that this is a temporary strategy aimed at more sophisticated clients," Invis warns. "It requires the guidance of a knowledgeable mortgage consultant to be executed successfully."
thestar.com
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