This is a good article, helps to explain why banks haven`t dropped their rates.
Feeling the pain
ROB CARRICK
QUOTE Historically speaking, we should be paying somewhere around 5 per cent for a discounted five-year mortgage right now.
The fact that we`re paying close to 6 per cent shows how tough it is to be a borrower of any type in a financial world turned squirrelly by the troubles in the U.S. subprime real estate market. It`s costing banks more to borrow the money they in turn lend out as mortgages and, naturally, this extra cost is being passed along to borrowers.
A good measuring stick for the cost of a five-year closed mortgage is the yield on five-year Government of Canada bonds. Data provided by Bob Dugan, chief economist at Canada Mortgage and Housing Corp., shows that posted five-year rates at major lenders have on average been priced at 2.44 percentage points above five-year Canada bonds for the past 7½ years. In other words, a five-year bond yield of 5 per cent would suggest posted mortgage rates of 7.44 per cent on average.
In September, the spread between posted five-year mortgages and the five-year Canada bonds was 2.9 percentage points, Mr. Dugan`s numbers show. In October, it rose to 3.21 percentage points and this week it reached 3.61 percentage points.
Economists have recently forecast that the Bank of Canada will cut rates as early as next month or in early 2008, but Scotiabank`s Mr. Gampel said it may take a little longer than that for mortgages to fall meaningfully. "If we are going to see rate relief on the mortgage side, it will come later rather than sooner, and that means probably some time in the late winter or early spring of 2008 at the earliest."
Mortgage math
The way to benchmark five-year mortgage rates is to compare them with five-year Government of Canada bond yields. Here are
comparisons for this month, and for November, 2006.
Nov., 2007 Nov., 2006
Posted big bank five-year mortgage rate yesterday : Posted big bank five-year mortgage rate 7.34% at month`s end :
Five-year Government of Canada 6.55%
bond yield: Five-year Government of Canada 3.73% bond yield:
Current spread: 3.85%
3.61 percentage points Year-ago spread:
2.70 percentage points
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Cheers
RW