News

Bank of Canada keeps overnight rate target at 3 per cent

OTTAWA – The Bank of Canada today announced that it is maintaining its target for the overnight rate at 3 per cent. The operating band for the overnight rate is unchanged, and the Bank Rate remains at 3 1/4 per cent.

Three major developments are affecting the Canadian economy: the protracted weakness in the U.S. economy; ongoing turbulence in global financial markets; and sharp increases in many commodity prices. The first two developments are evolving roughly in line with expectations in the April Monetary Policy Report . However, commodity prices are continuing to outstrip earlier expectations. This has led to further increases in Canada's terms of trade and real national income, and has altered the outlook for global and domestic inflation.

Although Canadian economic growth in the first quarter was weaker than expected, final domestic demand continues to expand at a solid pace. The economy is judged to have moved into slight excess supply in the second quarter of this year; excess supply is expected to increase over the balance of the year. High terms of trade, accommodative monetary policy, and a gradual recovery in the U.S. economy are expected to generate above-potential growth starting early next year, bringing the economy back to full capacity around mid-2010. Canadian GDP is projected to grow by 1.0 per cent in 2008, 2.3 per cent in 2009, and 3.3 per cent in 2010.

Total CPI inflation over the next year is expected to be much higher than projected at the time of the April Report . Assuming energy prices follow current futures prices over the projection period, total CPI inflation is projected to rise temporarily above 4 per cent, peaking in the first quarter of 2009. As energy prices stabilize and with medium-term inflation expectations remaining well anchored, total inflation is then projected to converge to the core rate of inflation at the 2 per cent target in the second half of 2009. Core inflation is projected to remain well contained and broadly in line with earlier expectations, averaging close to 1.5 per cent through the third quarter of this year and then rising to 2 per cent in the second half of 2009.

The three major developments affecting the Canadian economy pose significant upside and downside risks to the Bank's base-case projection. Weighing the implications of these, the Bank views the risks to its base-case projection for inflation as balanced.

Against this backdrop, the Bank judges that the current level of the target for the overnight rate remains appropriate. The Bank will continue to monitor carefully the evolution of risks, together with economic and financial developments in the Canadian and global economies, and set monetary policy consistent with achieving the inflation target over the medium term.

The Bank's detailed projection for the economy and inflation, and its assessment of risks to the projection, will be published in the Monetary Policy Report Update on 17 July 2008.

Information note:

The Bank of Canada's next scheduled date for announcing the overnight rate target is 3 September 2008.

The next Bank of Canada interest rate policy announcement dates are September 3rd, 2008 and October 21st, 2008.

Effective October 15, 2008, 40 year amortization will be reduced to a maximum of  a 35 year amortization, 5% will become the new minimum down payment (97% and 100% financing will be eliminated) and we are also on notice that the minimum for beacon score (credit score) will likely be increased.  All of this “to ensure the stability of the Canadian Housing Market”, as stated by the Bank of Canada. The question for most Canadians is “ What does this really mean and how does it affect ME?”

In a nutshell, what this means is your spending power for a new home has changed. Up until this announcement, you had the ability, with the appropriate credit approval, to purchase a house and finance the full price of that house. Having no down payment, you could go from being a renter to being a homeowner without the pain of having to save money for two to three years first. This also means that the home you could have afforded by spreading the payments out over 40 years may now be out of reach because the most you can stretch those payments to is 35 years. Essentially, at today's best rates for mortgage financing, for every $100,000 of mortgage that you have, it will cost you an extra $20.00 a month in mortgage payments. This doesn't sound like much, but when you are looking to buy a $350,000 home, that $70.00 extra could make the difference between approval or decline for your mortgage application.

Many mortgage lenders in the Canadian marketplace have removed the 40 year amortization and no down payment options from their lending criteria.

Not all is lost, it's not too late….

We still have some lenders that are happily accepting these applications . So, if you or someone you know is sitting on the sidelines and you think you/they may want 100% financing or the lower payments and easier qualification afforded by 40 year amortization, you/they need to get an application going sooner rather than later.  This landscape is changing rapidly. 

Take advantage of the relationships we have with our lenders to still get these beneficial programs accepted for you before the deadline of October 14, 2008.

New CMHC program permits families to purchase a "second home" with 5% down hi-ratio financing.  The home must be suitable and accessible for year round use, the owner must intend to spend some part of the year at that property or the property must be available for occupancy by a relative of the owner on a rent free basis.  Discounted interest rates and standard CMHC fees apply.

The changes in the CMHC hi-ratio mortgage insurance program - announced late February and taking effect March 1, 2004 - bring some new options for "downpayment" into play. Alternate sources of 5% down can now be considered. Several lenders are participating in these new programs - but not all. Please discuss with your mortgage broker.

Free Down Payment Mortgage - for first time homebuyers without a down payment - this program involves a "Cash Back" qualified to use as a down payment or true 100% financing. Must have own cash for "closing costs".

HELOC's - a Home Equity Line of Credit facility available to either 75% of appraised value or up to 90% of appraised value.  Interest rate at Prime.

Compliments of Brian Gentles AMP
Mortgage Consultant / Vice President

Email: mortgage.broker@telus.net