One Year Fixed Rate Mortgages Are Great Foxholes

The Bank of Canada cut the Overnight Rate by 0.50% this morning. This move leaves the Overnight Rate in our country at 0.50%, it may appear that the Bank of Canada has few options remaining but there is little doubt in my mind far more will be done.

First of all, to those of you who are in Variable Rate Mortgage's (VRM's) your mortgage rate will decrease next month by the same 0.50% that the Bank of Canada reduced its Overnight rate by. In the fastest response to a Central Bank in the history of our Country, all major Banks in Canada followed the Central Banks lead and cut the Prime Rate by the entire 0.50% within 30 minutes. This response, in addition to the statements made at the Bank of Canada's announcement this morning, lead me to believe that we are in store for some "Quantitative Easing", which will bring us a reprieve from these comparatively high borrowing rates.

As we have mentioned in our recent article "The 6 Year Mortgage Strategy", fixed rates are too high, and VRM's should not be sold at a premium to prime (for a copy of this article please send an email to info@mortgagemarcus.com).

If Canada intends to come out of this recession quickly, our Banks must begin to share the stimulus that is being provided to them by The Bank of Canada. Quantitative easing would mean further and more deliberate moves by The Bank of Canada to entice our Canadian Banks to lend us, the consumers and businesses, more money at cheaper rates.

We will soon begin to see more pressure from the media on the Canadian banks to reduce their lending rates. The move to reduce the Prime Rate today is only the tip of the reduced interest rate iceberg. The Bank of Canada realizes that there is a problem here. Our Canadian Banks are suffering from bad bets they made south of the border; these bets have infected them and are making them cautious to lend to us. This caution has increased the relative interest rates we must pay (relative to significantly reduced inflationary pressure). Our Central Bank realizes that it is only through the reduction of our borrowing rates that we will surface quickly from this recession.

When a recession occurs it is common to hear criticism that not enough was done early on to prevent it. Although we may have already waited too long to implement these quantitative easing measures, there is little doubt that they are on the way. No one wants to hear people say, "I told you so", and the Central Bank is no different. As we have been saying for the past 4 months, interest rates will continue to decrease in an effort to keep the economy moving. Please remember, "The 6 Year Mortgage Strategy". One year fixed rates are excellent foxholes in which to wait out the battle between the recession and quantitative easing. Within the next 8 to 12 months we will see a far different interest rate climate and entering into a 5 year fixed rate or variable rate mortgage at that time will be to your significant advantage.

For more information on quantitative easing or mortgage products please do not hesitate to contact us.

Marcus Tzaferis