Mortgage rates, car loans hit by credit crunch

[Source - By Philip Demont, CBC News]

As the global financial crisis continues, many companies and consumer face an apparent economic paradox.

While central banks in many industrialized countries chop short-term interest rates to boost economic growth, what it costs to borrow money to buy a house or a car will likely rise in the coming months.

On Wednesday, five central banks — the U.S. Federal Reserve Board, the Bank of Canada, the Bank of England, the European Central Bank and Sweden's Riksbank — all cut their near-term borrowing rates by half of a percentage point.

Car loan rates likely to rise as cost of cash jumps (David Zalubowski/Associated Press)

That followed Tuesday's breathtaking reduction of one full percentage point by the Reserve Bank of Australia.

The government banks are trying to reduce borrowing costs for other financial institutions and repair the increasingly illiquid capital markets around the globe.

"Interbank lending is essentially frozen," federal Finance Minister Jim Flaherty said Thursday in Ottawa.

Canada's central bank rate has set its target for overnight lending at 2.5 per cent while the U.S. Federal Reserve's fed funds rate now is pegged at 1.5 per cent.

At almost the same time, however, the TD Bank hiked what it charges on variable-rate mortgages, a move many analysts expect to be mimicked by other banks.

Read the whole story here: http://www.cbc.ca/money/story/2008/10/08/f-interestrates.html

Mortgages, capital and that darn TED spread

[Source - ReportonBusiness.com]

The Report on Business takes questions on the financial crisis.

Who owns Canada Mortgage and Housing Corp. and can it go under?

CMHC was set up by the federal government just after the Second World War to help deal with a housing shortage exacerbated by the huge number of soldiers returning home. It helped finance home construction and provided funds for low-income housing. In the 1950s, when banks got into mortgage lending, CMHC started insuring "high-ratio" mortgages where home buyers initially made only a small down payment. This summer CMHC stopped insuring mortgages with zero down payment or 40 year amortizations.

CMHC also subsidizes aboriginal housing, provides loans and grants for certain kinds of renovations, and gathers statistics on the housing market. It also buys mortgages from financial institutions, and repackages them as mortgage-backed securities, which it sells to investors.

Because CMHC is a Crown corporation - unlike Fannie Mae and Freddie Mac which were private companies - it is backed by Ottawa and could not really "go under."

Read the whole story here: http://www.theglobeandmail.com/servlet/story/LAC.20081010.RBANKSEXPLAINER10/TPStory/Business

Flaherty unveils $25-billion mortgage plan

[Source - Paul Vieira and Jamie Sturgeon, Financial Post]

The federal government said Friday it would inject up to another $25-billion of liquidity into the financial system through the purchase of insured mortgage pools.

In a speech delivered in Ottawa, Jim Flaherty, the Minister of Finance, said the move is aimed at maintaining the availability of long-term credit, which is under severe strain at present as banks are unwilling to lend to each other.

"It is becoming increasingly clear that the continuing disruption of global credit markets, which has been severe and protracted, is making it difficult for our financial institutions to raise long-term funding. This is beginning to affect the availability of mortgage loans and other types of credit in Canada," Mr. Flaherty said.

Read the whole story here: http://www.nationalpost.com/news/canada/story.html?id=873182

Canada banks go for smaller cuts to prime rates

[Source - Reuters - By Lynne Olver]

Canadian banks will pass along only part of a central bank rate cut to borrowers, with Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz) being the first to announce on Wednesday it will lower its prime lending rate by 25 basis points to 4.50 percent.

That is only half of the 50 point cut in administered rates made by the Bank of Canada earlier on Wednesday, when it acted with other central banks to lower key lending rates in an attempt to shore up investor confidence and ease the effects of the global credit crunch.

The Bank of Canada dropped its overnight rate target to 2.5 percent.

Canadian Imperial Bank of Commerce (CM.TO: Quote, Profile, Research, Stock Buzz), Royal Bank of Canada (RY.TO: Quote, Profile, Research, Stock Buzz) and Bank of Nova Scotia (BNS.TO: Quote, Profile, Research, Stock Buzz) said they would make the same reductions as Toronto-Dominion, bringing their prime rates to 4.50 percent from 4.75 percent, effective Thursday. Other banks were likely to follow suit, based on past patterns.

The prime rate influences borrowing rates on other consumer and business loans.

"There's certainly no rule that states that they have to cut their rates in lockstep with the Bank of Canada," said Steve Foerster, a finance professor at the University of Western Ontario's Ivey School of Business.

Click Here to Read More on Reuters.com

Central Banks Announce Coordinated Interest Rate Reductions

Throughout the current financial crisis, central banks have engaged in continuous close consultation and have cooperated in unprecedented joint actions such as the provision of liquidity to reduce strains in financial markets.

Inflationary pressures have started to moderate in a number of countries, partly reflecting a marked decline in energy and other commodity prices. Inflation expectations are diminishing and remain anchored to price stability. The recent intensification of the financial crisis has augmented the downside risks to growth and thus has diminished further the upside risks to price stability.

Some easing of global monetary conditions is therefore warranted. Accordingly, the Bank of Canada, the Bank of England, the European Central Bank, the Federal Reserve, Sveriges Riksbank and the Swiss National Bank are today announcing reductions in policy interest rates. The Bank of Japan expresses its strong support of these policy actions.

Bank of Canada lowers overnight rate target by 1/2 percentage point to 2 1/2 per cent

The Bank of Canada today announced that it is lowering its target for the overnight rate by 1/2 percentage point to 2 1/2 per cent. The operating band for the overnight rate is correspondingly lowered, and the Bank Rate is now 2 3/4 per cent.

Click here to read more from Bank of Canada Website

TD to raise rates on mortgages, home equity loans

The latest victims of the growing financial crisis could be the standard discount available to consumers on variable mortgages, and home equity loans at prime.

In a move expected to be followed by other banks, all of which have been stung by higher funding costs, TD Canada Trust is raising rates on both types of loans, effective Oct. 7.

Rates on these products will rise to 5.75 per cent, a percentage point above the prime rate. Only last week, TD eliminated the discount on its variable rate mortgages, offering them at the prime rate of 4.75 per cent. During the housing boom of the past several years, consumers could often get their bank to drop the rate by half or even up to a full percentage point.

“While TD Canada Trust has endeavoured to not pass on the increases in rates to its consumers, this change reflects steadily increasing costs of funds in the current economic environment,” the bank said in a statement.

The percentage point increase raises the term interest cost on a $250,000 variable rate mortgage by $12,247.22 over five years, according to Royal Bank of Canada's online mortgage calculator. The difference is based on a 25-year amortization, a variable rate mortgage with a five-year term and bi-weekly payments. On that basis, the bi-weekly payment amount rises to $725.90 from $657.83.

The credit crisis and economic uncertainty have caused banks to stockpile their cash. That's driving up their short-term cost of borrowing from one another, and means margins on variable rate mortgage products are shrinking.

Rates on fixed-term mortgages went up last week too, as banks have passed on fewer of their savings from falling bond yields to consumers to consumers.

“The deterioration of global credit markets is beginning to squeeze the ability of even the strongest of financial institutions to raise longer-term funds, which could limit the provision of longer-term credit in Canada to businesses and households,” federal Finance Minister Jim Flaherty said in a statement Monday.

“Hopefully this isn't a permanent shift, but a short-term reaction to conditions the likes of which we really haven't seen before,” said Gary Siegle, regional manager at mortgage broker Invis.
With a discount, some customers can still get five-year, fixed-rate mortgages at 5.55 per cent, meaning a bi-weekly payment of $707.66 on a $250,000 mortgage amortized over 25 years. This means those looking for peace of mind in the current market turmoil aren't paying a premium to lock in, Mr. Siegle said.

[Source - LORI MCLEOD // Globe and Mail Update // October 6, 2008 at 8:46 PM EDT]

What's the best strategy as mortgage rates rise?

Source ROB CARRICK - Globe and Mail Update
September 30, 2008 at 6:19 PM EDT

The credit crunch has hit home with yet another move by the big banks to jack up the cost of mortgages.

Mortgage brokers report that the big banks and other lenders have stopped offering variable-rate mortgages with a discount off the prime rate.

It was common in the first half of 2007 to get a variable-rate mortgage at prime minus a full percentage point, said Jim Tourloukis of Advent Mortgages in Markham, Ont. Since then, the discount had gradually fallen to 0.4 of a percentage point as of last week.

“As of yesterday, virtually everybody was offering variable-rate mortgages at prime,” Mr. Tourloukis said. “In other words, no more discounting.”

Forced to pay more to raise the money they lend out to customers, the banks have set fixed mortgage rates far higher than they would be under normal circumstances. Now, variable-rate mortgages have been affected as well. What's the right strategy for borrowers?

Your choices: a variable-rate mortgage at 4.75 per cent, which is the current prime rate at all major lenders, or a discounted five-year mortgage at rates in the low 5-per-cent range.

The lower variable rate means you'll save money in the near term, but it also opens you up to the risk that rising interest rates will boost your borrowing costs somewhere down the line.

“If I'm the average Joe, I would be taking the five-year rate right now because I don't know what's going on out there and I don't want to risk my house,” Mr. Tourloukis said. “I don't think rates are going to go up, but I don't want to worry about it.”

Mr. Tourloukis said about 90 per cent of his clients were going with variable-rate mortgages prior to this week, and he expects the same big majority to swing over to fixed-rate mortgages going forward.

The problem with fixed-rate mortgages – almost everyone picks the five-year term – is that you'll have to work hard to get a good deal. Posted five-year rates at major lenders are around 7.2 per cent, and some banks are posting “special” discounted rates of 6.14 per cent on their websites.

However, Mr. Tourloukis said he was able to get five-year mortgages as low as 4.99 per cent. Alternative banks and credit unions have been offering rates as low as 4.99 to 5.45 per cent.
Brian Matthey, a mortgage broker in Kingston, Ont., said five-year mortgages would be going for about 4.35 per cent today under normal circumstances in financial markets. He stressed the importance of shopping around for a mortgage right now and not settling for whatever discount your bank is willing to dole out.

“The banks are going to freewheel as they need to in terms of what they offer their clients,” Mr. Matthey said.

If you have any questions regarding this article or on variable or fixed rates, please call Greg Barrow, DLC Perfect Mortgages at 416 807 7123 or email gbarrow@dominionlending.ca