As the nail biter in Europe continues this week, two economists are predicting the Bank of Canada will move to cut rates in a big way next year.

Sheryl King, an economist at Bank of America Merril Lynch, said in a note that the volatility hitting Europe and the risk of damage to the global economy means the Bank of Canada will move to cut its benchmark interest rate to ward off the risk of recession. Her prediction is the cut will be a whopping 0.75% decrease from the current rate of 1%.

“With the Eurozone sovereign debt and banking crisis showing no sign of containment, we think the Bank of Canada will cut rates back to the effective lower bound of 25 basis points (0.25%) early next year,” she said.

Ms. King forecasts that the cut would come in two phases, with a 0.50% trim being announced during the bank’s January 17 meeting, while the second and final 0.25% cut coming during the March 8 meeting.

Also predicting a lower interest rate next year was David Madani, Canada economist at Capital Economics. He is forecasting a more mild cut of 50 basis points, however, saying he expects it to occur in April or June.

Either way, Mr. Madani said he expects interest rates in Canada will remain low for some time.

“The Bank might communicate that its policy rate will remain at 0.50% for a lengthy period of time, conditional on its projected outlook for consumer price inflation,” he said, in reference to the Bank of Canada’s target of 2% annual inflation.

“Even if we are wrong, the broader message remains that interest rates will remain unusually low for a very long time.”

Most economists, however, are still predicting that the Bank of Canada will raise interest rates rather than lower them in 2012. In a recent Reuters survey of 40 economists last month, the consensus was that an interest rate increase will occur in the third quarter of next year.

If rates are cut, it will mark a sharp turnaround for the Bank of Canada, which only last year raised interest rates. Canada became one of the first advanced economies to raise its benchmark interest rates following the recession when the Bank of Canada implemented a 25 basis point hike in September of last year. The benchmark rate has since remained unchanged at 1%.

But are those premiums competitive? How much will you pay annually for what type of coverage; and what is written in the fine print?

Lending institutions ancillary mortgage products are not the only ones on the market. Independent insurance companies also offer varying types of mortgage protection that can save consumers hundreds of dollars annually.

This month, CENTUM announced an arrangement with Benesure Canada Inc., to make its Mortgage Protection Plan coverage available through participating CENTUM mortgage broker offices and franchises. The plan was first made available to clients of Canadian mortgage brokers in 1995 – today it insures more than 160,000 Canadians.

Says Paul Therien, Director of Business Development for CENTUM, “Mortgage protection is an extremely important part of every transaction and warrants an ongoing review of the best products out there. Based on what we think is the best fit for CENTUM and our clients, we chose Mortgage Protection Plan to recommend to our people.”

Whichever mortgage insurance plan you select, it’s good to know that even with mortgage protection insurance, there is competition. There is nothing stopping you from shopping around for the best mortgage protection for you with the most affordable premiums – the same as you would for any product.
MortgageByDarren – Blog.

If you’re looking for a home with that ‘lived-in’ feel – you’re in luck.  The HST does not apply to resale properties, although you will pay more tax on certain real estate transaction fees.

Here’s a brief look at the rebate program in BC and Ontario:

Federal Portion of the HST (5 percent GST)
Regardless of their provinces of residence, Canadian homebuyers must pay GST (Federal portion of the HST) on new home purchases. They can claim up to 36 percent of the GST on the purchase price or cost of building a new house. The claim amount declines on homes above $350,000 and reaches zero on homes priced at $450,000 or more.

According to the Canada Revenue Agency, you cannot claim the new housing rebate if you don’t intend to use the home as your primary place of residence, i.e. you buy it as an investment property.

Ontario HST (8 percent PST / 5 percent GST)
Across all price ranges, homebuyers in Ontario are eligible for a rebate on 75 percent of the provincial portion of the HST on the first $400,000 value of a new home, and pay the full eight percent provincial tax on the amount above $400,000. They can claim up to a combined maximum federal and provincial rebate of $24,000.

British Columbia HST (7 percent PST / 5 percent GST)
The rebate in BC is 71.43 percent of the provincial portion of the HST up to a combined maximum rebate of $26,250. According to the proponents of the tax, buyers of new homes up to a value of $525,000 pay no more provincial sales tax than they did before imposition of the HST.

The most glaring problem with HST in BC and Ontario are the new housing rebate thresholds:  $400,000 and $525,000. Anyone who has shopped for a new home in Vancouver or Toronto lately can tell you that these are far from realistic.

It will be interesting to see how the HST will influence home buying behavior and building starts. Will it be a boon for resale homes, or will we see an increase in new home sales in smaller communities and non-HST provinces like Alberta, where taxes are the lowest in the country? In urban centres, will it influence the already noticeable buyer trend toward micro suites and laneway homes?

If you are qualified for a mortgage under $525,000 in BC and $400,000 in Ontario, or want a resale property, you don’t have to worry. But to get more space, you will likely need to look farther out from the downtown cores to stay under the rebate threshold.

The CENTUM mortgage calculator is a great tool to start planning for your next property purchase.

Survey highlights include:

49 percent of those surveyed say that their firms’ sales volumes are greater than in the previous twelve months, compared to only 22 percent in the first quarter of 2010.

50 percent expect their firms’ levels of employment to be higher in the next twelve months than in the previous year. The last three quarterly survey results have remained consistent, with about half of respondents expecting an increase in employment – the highest since the last half of 2006 and early 2007.

47 percent of survey respondents expect that prices of goods sold will increase at a greater rate in the next twelve months, which is a reflection of opinions that cost of goods purchased will also rise.

As for inflation, the majority still believes that it will remain at one to two percent, although momentum seems to be shifting. More firms (45 percent, up from 40 percent last quarter) now think that the rate of inflation in the coming year will be two to three percent.

What Does This Mean to You?

The Business Outlook Survey shows that while firms are optimistic about the future, they are more cautious in that optimism than they were at the end of 2009.

For potential homebuyers and owners worried about job stability or securing employment, the numbers are promising, with half of business leaders surveyed expecting their employment numbers to rise and only ten percent suggesting they will reduce their workforces.

The Bank of Canada key interest rate is rumoured to rise on these signs of confidence. For those wanting to beat the interest rate heat, the Globe and Mail offers these tips from Investopedia.com:

Five Things To Do Before Interest Rates Go Up.

What might your future mortgage payments be if lending rates rise on or after July 20^th? Use the CENTUM mortgage calculator to gauge your monthly or bi-weekly payments.

Whatever the source, word of mouth often leads to realization of predictions as more homebuyers take a wait-and-see attitude. But, according to a National Post report, home prices will continue to creep up in 2010 before they drop slightly in 2011.

While experts argue on the severity of a real estate correction, most agree that prices are moving towards a flat line in the coming months.  Real estate investors might consider selling now, then reinvesting their dollars as buying opportunities become available.

Pre-approved mortgages allow potential home buyers a window of time during which they can ‘shop around’ for affordable properties while holding on to their negotiated rates – usually for a period of two to three months. With interest rates set to rise, and prices heading downward…now might be the time to sell and reinvest your profit, or get pre-approved for a new mortgage.

Housing and consumer spending in Canada fed a robust 6.1 percent growth in the economy in the first quarter of this year. However, in a media statement released today, the Bank of Canada cited continuing global market instability as a reason for remaining cautious on interest rate increases:

This decision still leaves considerable monetary stimulus in place, consistent with achieving the 2 per cent inflation target in light of the significant excess supply in Canada, the strength of domestic spending, and the uneven global recovery.

Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments.

Canadian banks followed today’s announcement by hiking prime rates. Reaction has been tame, considering that interest rates in Canada remain at historic lows and the move was anticipated for months. A Canadian Business article reports that variable rate mortgage holders remain largely unfazed by the rate increase, believing that they still stand to save by following the rate gradually upward – rather than locking in at a higher fixed rate, for now.

CTV News coverage of the rate increase is more ominous, quoting a Business News Network spokesperson as saying that this is the “Nail in the coffin” for historically low interest rates. Maybe so, but as long as Canadians taking out variable rate mortgages today can control their personal debt loads, they should be able to withstand small increases in their mortgage payments.

As always, opting for a fixed mortgage rate is recommended for buyers who prefer to play it safe and not polish the crystal ball. The Bank of Canada scheduled the next announcement of its overnight rate target for July 20, 2010.

Even the Globe and Mail heralded on the front page of its business section “Commercial real estate bounces back,” saying an 18-month slump in Toronto is over and that other urban centres shouldn’t be far behind – all signs that Canada’s commercial market has “de-coupled from its troubled U.S. counterpart.”

In the U.S. talk is centred on the Commercial Mortgage Backed Securities program and how it threatens to eat up bank balance sheets and potentially reverse any economic progress the country has made.
Dale Bilton, a commercial broker with Mortgage Intelligence, said that Canada is “very blessed” in that it “didn’t experience what they did in the U.S.”

He recently partook in a commercial investment roundtable hosted by CMP’s sister magazine, Canadian Real Estate, in which the theme was more about ample opportunities rather than dealing with losses. “There has been a slow down in the past year,” said Bilton. “However, my lenders that I’m dealing with, which are institutional in most cases (i.e. charter and near-charter banks) are aggressive – they have funds to put out.”

The Globe also points to stats from industry tracker RealNet Canada Inc., which show that “investments in commercial property in the Greater Toronto Area increased by 46 per cent in the third quarter over the second quarter, to $1.31-billion, while the number of transactions increased by 20 per cent,” it said.
And while the numbers may not be near 2007′s, which was closer to $3 billion, CB Richard Ellis vice-chairman John O’Bryan told the paper that it’s still encouraging.

“Before things can get better, they have to stop getting worse and start to firm up – and this is what we are seeing,” he said.

Key Central Bank Rates

By Kevin Carmichael
Ottawa — Globe and Mail Update Published on Tuesday, Oct. 20, 2009 9:08AM EDT Last updated on Tuesday, Oct. 20, 2009 10:36AM EDT

The Canadian dollar’s race toward parity risks “more than fully” offsetting the benefits from a surprisingly strong recovery from recession, the Bank of Canada said Tuesday.

Explaining their decision to leave the benchmark interest rate at a record low of 0.25 per cent, policy makers said the loonie’s ascent to levels around 97 cents (U.S.) in recent weeks is hurting Canadian exporters’ ability to participate in a global economic rebound that is stronger than they expected it would be in July.

So even though a “recovery in economic activity is also under way in Canada,” policy makers actually pushed back their outlook for when inflation will return to the central bank’s target of 2 per cent to the third quarter of 2011. The reason is the dollar, which is making Canadian goods more expensive in the U.S., the country’s largest trading partner, and in international markets that tend to price in U.S. dollars.

“Heightened volatility and persistent strength in the Canadian dollar are working to slow growth and subdue inflation pressures,” the Bank of Canada said in a statement. “The current strength in the dollar is expected, over time, to more than fully offset the favourable developments since July.”

The central bank’s latest policy statement raises the likelihood that the central bank will stick to its pledge to leave its key overnight target at 0.25 per cent until June 2010, and could stoke speculation that Governor Mark Carney will opt to leaver interest rates near zero for even longer.

That’s because the pledge is conditional on the central bank’s outlook for inflation, which it is mandated by law to keep at an annual rate of about 2 per cent. The latest inflation figures show consumer prices are actually declining, meaning the central bank has to find a way to stimulate growth to put upward pressure on prices.

“The greater persistence of slack in the economy, and attendant downward pressure on inflation, provide more reason for the Bank of Canada to delay rather than advance any tightening in policy,” Paul Ferlely, Royal Bank of Canada’s assistant chief economist, said in a note to clients.

If not for the dollar’s ascent, Canada’s recovery would be much stronger.

The central bank said global and financial developments have been “somewhat more favourable than expected” since their last quarterly economic report in July.

At home, the economy is getting a lift from low interest rates and government stimulus spending, increased household wealth, improving financial conditions, higher commodity prices and strong business and consumer confidence, the Bank of Canada said.

The Bank of Canada began chopping its benchmark overnight lending rate last October as the recession took hold. After six cuts in a row, the key rate sits at 0.25 per cent, the lowest since the central bank was founded in the mid-1930s.

Nevertheless, the stronger currency is robbing Canada of wealth generated from exports, leaving the country’s economy to operate on one engine.

“The composition of aggregate demand will shift further toward final domestic demand and away from net exports,” the central bank said.

For the short term, gross domestic product will grow faster than the central bank expected. Policy makers said growth in the second half will be “slightly higher” in the second half than previously thought, although they didn’t provide a figure.

However, over the next couple of years, growth will be lower than predicted in July. Canada’s economy is expected to expand by 3 per cent in 2010, which is unchanged from three months ago, and 3.3 per cent in 2011, which is lower than the previous forecast of 3.5 per cent.

The loonie fell more than a cent after the Bank of Canada’s release, tumbling to about 96 cents (U.S.) from 97.15 at 4.30 p.m. (EDT) yesterday, which is when the central allocates a closing value.

The comments on the dollar were the strongest yet in a verbal campaign that dates back to early June, when the Bank of Canada first raised concern that the currency could impede the recovery.

Mr. Carney’s efforts to keep speculators guessing about whether the central bank will intervene is some way to make the Canadian dollar a less profitable trade have had some success at slowing the currency’s rise.

However, lately, the loonie had appeared to have come untethered. The currency has gained about 5 per cent since the central bank’s last economic report on July 23, most of that in the last couple of weeks, as global investors become more confident about the rebound and seek better yields than are on offer in the U.S.

The central bank’s downward revision of Canada’s longer term growth prospects suggests policy makers suspect the loonie’s increase as more to do with speculators than fundamental factors such as higher commodity prices, said Michael Gregory, a senior economist at BMO Nesbitt Burns in Toronto.

When the dollar is rising along with increases in the price of commodities, the net effect on the economy is less severe, if not a wash. A gain driven mostly by speculative pressures has a net negative impact on growth, according to the central back.

By pushing out its inflation forecast, traders may begin to bet that interest rates will stay low in Canada longer than they thought, making jurisdictions where central banks are raising interest rates, such as Australia, more attractive.

Before today’s announcement, some investors were betting the Bank of Canada would raise interest rates early in 2010, according to futures contracts whose yields are based on future interest rate expectations.

The changed inflation outlook “makes it incrementally easier for the Bank to stick to its commitment” to keep the benchmark lending rate at 0.25 per cent until June, Mr. Gregory said in a report to his clients.

There have been whispers that we may be nearing the end of the recession. Can you comment on this?

John Turner: According to BMO’s Economics Department, the whispers are turning to shouts. Canadian consumer spending has turned upwards, while the housing market has seen an astonishingly fast recovery. Financial conditions are much improved and confidence is on the mend. BMO Economics estimates that Canada’s recession ended in the third quarter, following three consecutive quarterly contractions. Aggressive monetary stimulus and hefty fiscal spending appear to have turned the economy around a little sooner than previously thought.

Do you think the Bank of Canada, by making the announcement on July 23, 2009 that the recession is over, is preparing Canadians for a rate increase (even though it said it wouldn’t for 12 months)?

JT: BMO’s economists think not. They think the Bank truly believes it won’t need to raise rates until mid-2010. The recovery, at least initially, is expected to be soft due to weak U.S. demand. The unemployment rate is expected to climb moderately further, and inflation should remain below target for a couple of years until the slack is absorbed.

It was recently reported that home sales have jumped 40 per cent between January and May 2009. Aside from low interest rates, what other factors could have contributed to buyers getting off the fence and purchasing?

JT: There are a number of contributing factors, including pent-up demand accumulated during last year’s downturn, the federal government’s tax credit incentive for first-time home buyers, a growing sense that the worst of the global economic crisis is behind us and the government’s insured mortgage purchase program which kept the credit taps flowing.

Of course, with interest rates being relatively low, this means lower mortgage payments for both first-time homebuyers as well as others. In some areas, prices have been holding steady and/or decreasing with recent market compression; this has led to better access to homeownership, which is a great investment. Everyone needs a place to live, and buying a home not only fulfils that need but also acts as an important component of a wealth accumulation strategy.

How might the forecasted increase in housing starts affect the real estate market from a buyer’s perspective?

JT: BMO’s economists expect housing starts to trend higher as the economy recovers, but remain soft for a while as a result of some overbuilding during the previous boom. The rising starts will help to keep the market balanced, since it now risks shifting back to a sellers’ market if demand remains strong. The current four-month supply of resale listings is in line with, if somewhat below, historic norms.

The age old debate of fixed vs. variable is alive now more than ever. What should buyers take into consideration when deciding?

JT: It all depends on what the buyer is comfortable with and what they’re looking for. Fixed rate mortgages are great for Canadians who are concerned about upward pressure on rates and who are looking for peace mind. With a fixed rate mortgage they get the peace of mind of knowing what their payments are going to be and how much of their mortgage they will have paid down at the end of their term.

On the other hand, variable rate mortgages – when taken over the long-term – have proven to be a winning strategy for Canadians over the last 25 years. Each buyer’s circumstances are different and we invite Canadians to speak to a BMO Bank of Montreal mortgage specialist for the best individual advice.

By CMP | Wednesday, 30 September 2009

Fixed-rate mortgages declined a little last week, but the most dramatic changes can be seen in variable-rate mortgages. For the first time in almost a year, it’s possible to get a variable-rate mortgage at the prime rate used by most major financial institutions, which is currently 2.25 per cent.

Pre-crisis, variable-rate mortgages came with discounts that ranged from 0.75 percentage points to as much as 0.9 points off prime. By late last fall, crisis conditions prompted lenders to start charging prime plus a full percentage point or more. Now, some lenders are starting to unwind their crisis-rate premiums.

“Variable-rate mortgages are all over the map right now,” said Gary Siegle, regional manager with the mortgage brokerage firm Invis Inc. in Calgary. “We’re seeing them right in the area of prime with some lenders.”
An example of a variable-rate mortgage at prime: ResMor Trust, a small player that deals through mortgage brokers, is offering four-year variable-rate mortgages at prime in all provinces except Quebec. The catch: You have to have your mortgage approved by Sept. 30 and close the purchase within 45 days.

Can variable-rate mortgages fall back to their pre-crisis lows any time soon?
“Definitely, 100 per cent, no,” said Robert McLister, a mortgage broker and author of the Canadian Mortgage Trends blog (canadianmortgagetrends.com). “Could they get a little below prime? Definitely.” Okay, it’s strategy time. With prime at 2.25 per cent and fully discounted five-year fixed-rate mortgages going for something in the area of 3.9 to 4.1 per cent, you’re got some thinking to do if you’re buying a home or renewing a mortgage.

The variable rate looks tempting. Sure, the prime is going to rise in the medium term, but it’s expected to stay put until next spring at least. Even when prime does move higher, it will have to increase by roughly 1.75 percentage points to get to where today’s five-year mortgages are.

“The risk is obviously that rates go up a lot more,” Mr. McLister warned. “Rates went down four percentage points from December, 2007, through April, 2009. They could easily go up four – why not?” Variable-rate mortgages allow you to lock into a fixed-rate mortgage, so there’s no reason why you have to ride interest rates all the way up. Still, you have to recognize that fixed-rate mortgages could be significantly more expensive by the time you decide to lock in.

An academic study of rates between 1950 and 2007 found variable-rate mortgages were the money-saving choice over five-year fixed-rate mortgages 89 per cent of the time. If you’re willing to ride rates higher for a while in hopes of longer-term savings on interest costs, then consider a possible approach suggested by Mr. McLister.Instead of arranging a variable-rate mortgage now, go for a one-year fixed-rate mortgage. Then, when you’re renewing in one year’s time, you’ll move into a variable-rate mortgage that will ideally have a rate that is discounted below prime.

Fully discounted one-year closed mortgages today go for about 2.55 per cent, so you’re not paying much of a penalty at all compared with what variable-rate mortgages are pegged at right now. Another suggestion from Mr. McLister is to consider a three-year mortgage, which offers an attractive blend of low rates and security against interest rate surges. Three-year mortgage typically go for around 3.39 per cent on a fully discounted basis, but he knew of one small lender offering 2.9 per cent through the mortgage broker channel.

The case for going with a five-year fixed rate is that rates are very cheap by historical standards. Rates were a little bit lower last spring, but they’re not as high as they were a month or two ago thanks to a pullback in bond yields that has trickled down to fixed-rate mortgages. Mr. Siegle said over half of his firm’s clients are locking into a fixed-rate mortgage right now. “You can’t ever time the bottom of the market, but are these good rates that you can be comfortable with? A lot of people are saying, ‘yeah, they are.’ “

ROB CARRICK