As of April 19, 2010 certain mortgage products are required to qualify at the Bank of Canada’s Qualifying Rate. This video explains how the Qualifying Rate works and what mortgage products are affected by it.

Since the Bank of Canada Prime Rate is in the news with the first increase in a year…we thought it would be pertinent to review the differences between Variable Rate and Fixed Rate Mortgage products.  Knowing how the two mortgage products work is necessary to make the best decision for your mortgage!

Today, June 1, 2010 the Bank of Canada increased the Prime Rate by .25% from 2.25% to 2.5%…Learn how this affects Variable Rate Mortgages and other financial transactions you may have!

Don’t have cash for a down payment?  Don’t worry…if you have RRSP’s and you are wanting to purchase your first home…the Canadian Government has a program designed especially for you!  Watch the video below to learn how to use your RRSP’s to help purchase your first home.

The Bank maintained its forecast that stronger growth will likely be reported for the final quarter of 2009, after a disappointing third-quarter performance, with the economy forecasted to build momentum throughout 2010. Most experts maintain that 2010 will see stronger growth including an improved employment outlook, increase in investment in machinery and equipment, and large gains in the leading indicators index.

However, the strengthening in the Canadian dollar and weak  U.S. demand may cause a slight risk to Canada’s recovery. Last week’s reiteration that overall risks are “tilted slightly to the downside” as a result of policy operating at the lower bound indicates that the bank’s policy plan remains intact and it is unlikely that there will be a change in the overnight rate before the end of the second quarter of this year. However, this cannot be written in stone.  Huge employment gains and strong 2009 fourth quarter numbers could change the timing of the rate increase.

Many forecasters are still expecting Canada’s economy to gain strength; perhaps though, more slowly than earlier recoveries.  This may in turn likely delay raising the overnight rate until the summer of 2010.

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/4 per cent. The Bank Rate is unchanged at 1/2 per cent and the deposit rate is 1/4 per cent.

Information received since the Bank’s April Monetary Policy Report (MPR) is broadly consistent with the Bank’s medium-term outlook for output and inflation in Canada. The economy is undergoing major restructuring in a number of sectors. The already significant output gap will continue to widen through the third quarter, putting downward pressure on inflation. The Bank continues to expect that the global and Canadian recoveries will be more muted than usual.

In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence have recovered modestly. If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors.

The outlook is subject to considerable uncertainty. While the underlying macroeconomic risks are roughly balanced, the Bank judges that, as a consequence of operating at the effective lower bound, the overall risks to its inflation projection remain tilted slightly to the downside.

Conditional on the outlook for inflation, the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010 in order to achieve the inflation target.

The Bank retains considerable flexibility in the conduct of monetary policy at low interest rates, consistent with the framework outlined in the April MPR.

The next scheduled rate announcement is July 21, 2009.

As long as our economy continues to experience the downturn that its in, the rates will remain historically low.  Eric Lascelles, chief economics and rates strategist at TD Securities: “My inclination is to say mortgage rates are likely to remain unusually low for some time.”  Will Dunning, chief economist for the Canadian Association of Accredited Mortgage Professionals: “I don’t really see rates moving a whole lot.”

Typically, five-year fixed mortgages are pegged at 1.1 to 1.2 basis points above the five-year Government of Canada bond yield.  With the financial crisis of the past 18 months, this difference has increased, to upwards of 3 points; however it is falling now to clower to 2 points and will continue to fall.  This allows room for further mortgage rate decreases.

Variable-rate mortgages are slightly different, they operate off of the Bank of Canada’s prime lending rate.  While 18 months ago and longer you could get variable-rate mortgages at prime minus, we have seen in the last 18 months move to prime plus.  However, as with the fixed-rate mortgages, the trend is falling back to pre-18 month ago trends.  Some Lenders are looking at variable-rate mortgages at rates closing to prime.

So, is now the time to lock in your variable-rate mortgage?  In short, no.  Because the Bank of Canada has committed to keeping is prime lending rate steady for as long as a year, while facing the worsening state of our economy, Lending institutions will also follow suit. However, if you have a more recent variable-rate loan, one with a rate of prime plus greater than 1, perhaps you should look at locking in to 5 year fixed rates.  Fixed 5 year rates are at about 3.75%, allowing people a very low interest rate to lock into for 5 years, versus floating with the variable-rate through the next 5 years.  This all depends on your financial situation and your risk-tolerance level.

With historically low rates, there are a number of scenarios that we should all be considering.  Penalties for breaking a mortgage term that is only a year or so old are very high, however this can often be rectified through blended mortgages, taking advantage of lower rates, and waiting until you are further into your term.  Just remember, that these rates are indeed historically low, never before seen interest rates, that will definately not last forever!

The printing of money would cause an influx in the economy through the Bank of Canada’s ability to buy a variety of assets such as asset-backed securities, government bonds, corporate bonds, and even stocks.  The purchase of these financial assets works to  decrease the supply of these bonds in the market and increase prices.  This in turn, drives down yields, which fixed-rate mortgages are based on.  This in turn reduces the cost of borrowing and enables more people to qualify for loans to generate economic activity.  

Although quantitative easing sounds like it is a great thing and it works to stimulate the economy, it does not come without negative effects as well.  With the implementation of Quantitative Easing comes a recovery in the economy, which comes with inflation.  When we have higher inflation, it leads to higher interest rates.  The more money there is floating around in the economy, the less value it has, which in time buys us less, which means we need to make more to keep up with the lifestyle that used to cost us less.  In essence, costs rise, which means wages rise, and we have inflation!  Once the inflation rate rises, the Bank of Canada raises the Prime Lending Rate, and interest rates rise.  How long will it take for inflation to catch up if Quantitative Easing is in introduced, it is hard to predict.  Economists around the world have argued and continue to argue this.  

What does all of this mean to someone with a mortgage, or looking to find a mortgage?  In essence, no one knows how long these low interest rates will be around for.  We are all celebrating the low interest rates of today, but we need to be careful as these historically low rates will not be here for forever!