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Mortgage rates as low as 3%

‘Not going to change the course of the market’

Garry Marr, Financial Post

The latest rate cut means consumers buying a house can borrow for as little as 3% interest on their loan if they are willing to buy into the Bank of Canada’s statement yesterday that it won’t be changing rates until June, 2010.

If you don’t believe the bank will hold steady on its promise, you can lock into five-year, fixed-rate mortgages for as low as 3.59% on a discounted basis – the lowest rate in Canadian history.

“What is 25 basis points among friends? It’s really nothing,” said Benjamin Tal, senior economist with CIBC World Markets.

“This is not something that is going to change the course of the market. It only helps at the margin.”

Mr. Tal said mortgage refinancings are up dramatically in the past few months as Canadians who might have borrowed at 5.75% two years ago are ready to eat any interest rate penalty because a five-year rate mortgage is now so low.

The penalty to break an existing mortgage is the greater of three months’ interest or what is called the interest rate differential. The interest rate differential is the lost interest between your current rate and market rates.

Mr. Tal said while there is not much lower for variable-rate mortgages to go, the gap between short-term money and long-term money is still significant enough that the temptation is not to lock in.

“You might do better the first two years [of a five-year mortgage] but not the remaining three. I’m convinced long-term interest rates will rise. I can see [long-term rates] rising 200 basis points. These are emergency rates and at some point this emergency will end,” the economist said.

John Turner, director of mortgages at Bank of Montreal, said he’s never seen anything like what is going on in today’s market.

“There is a possibility of another drop,” Mr. Turner said. “But does your tummy feel good about something that has a higher possibility of going up than going down any further?”

Don Lawby, chief executive of Century 21 Canada, said while rates are declining, banks are getting tighter with how they hand out credit.

“If you are self-employed, the banks are demanding more documentation. Appraisals are getting harder, too. It’s not what you bought the house for but what it’s appraised for,” said Mr. Lawby, who also heads up a mortgage brokerage. “There is not a lot of subprime out there for people with any credit problems in their history.”

Bank of Canada is Changing:

By cutting its benchmark-lending rate, or target rate, by an additional 25 basis points, to 0.25%, the Bank of Canada was forced to make changes to its operating system to ensure the smooth functioning of money markets. Here is a summary of the changes:

- Narrow its operating band to 25 basis points, and is now between 0.25% to 0.5%. Generally, the band is 50 basis points, under which the top represents what the central bank charges lenders for loans; the bottom, what it pays on deposits; and the middle is the benchmark rate. But now, the low and midrange points are identical, in an effort to encourage banks to lend and obtain a better return to what they would otherwise holding the cash at the central bank.

- Provide excess cash in the system on a daily basis of $3-billion to drive down lending costs toward its 0.25% target. That is a significant boost from the $25-million a day the central bank usually leaves in excess.

- Roll over a portion of its outstanding stock in one-and three-month financing with market players, into six-and 12-month terms, in an effort to drive down borrowing costs.

- Reserves the right to enter into special purchases of securities to put downward pressure on the rate banks lend to each other.

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Contact Laurin Jeffrey for more information  -  416-388-1960

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