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Bank of Canada Outlook - Rate Alert
Check out the article and rate specials! RATE ALERT UPDATE Bank RatesTermOUR RATES 3.00 % Prime Rate 3.00 % 3.00 % 5 YEAR VARIABLE 2.80 % 3.35 % 1 YEAR CLOSED 2.74 % 3.60 % 2 YEAR CLOSED 2.74 % 4.15 % 3 YEAR CLOSED 2.89 % 4.34 % 4 YEAR CLOSED 3.09 % 4.99 % 5 YEAR CLOSED - 30 Day 3.24 % 5.29 % 5 YEAR CLOSED - 90 Day 3.29 % 5.69 % 5 YEAR CLOSED - 120 Day 3.29 % *Note: Rates are subject to change without notice and OAC. Please contactus for more information BoC Hints at “Withdrawal of…Stimulus” The Bank of Canada held the line today and left the country’s pace-setting overnight rate at 1% - ensuring prime holds at 3%. The news, however, is not what the BoC did, but what it hinted at doing. Governor Mark Carney and co. jostled expectations in their prepared statement, which said: Overall, economic momentum in Canada is slightly firmer than the Bank had expected in January. The economy is now expected to return to full capacity in the first half of 2013. The profile for inflation is expected to be somewhat firmer than anticipated. Europe is expected to emerge slowly from recession in the second half of 2012 In light of the reduced slack in the economy and firmer underlying inflation, some modest withdrawal of the present considerable monetary policy stimulus may become appropriate. This last point, in particular, has put the bond market on edge. As of this writing, 5-year yields are up sevenbasis points since this news broke, and up 10bps on the day. (Bond yields lead fixed mortgage rates.) Prior to this morning’s announcement, the market expected the Bank of Canada to move rates in early 2013. We could now start seeing some economists shift rate hike predictions to Q4 of this year. BMO has already moved up its forecast by six months to year-end 2012, according to BNN. The BoC will still want to see more data before pulling the trigger, however. Canada remains tightly constrained by cautious U.S. growth, and that growth has had a funny habit of disappointing after optimistic spurts in the spring. We also have the same contingent of Eurozone countries still battling ongoing solvency fears. Pending the next few months of domestic data, the storylines in the U.S. and Europe have the potential to continue weighing down Canadian rates. For now, today’s BoC decision to leave the overnight rate at 1% means that prime rate should remain at 3.00%. The nextBank of Canadarate meeting is June 5. Please contact me directly for free no obligation rate lock or full pre-approval Regards, Derek F. MacLean, Senior Mortgage Agent W: (613) 627-1045 C: (613) 304-7931 Email Us | www.mortgagesinthecapital.com Apply Now
Week in review
Real GDP continued to recover in August, gaining 1.2% m/m, a result above the +0.9% print expected by consensus. This marks the fourth monthly gain in a row for this indicator, however total output is still down 4.6% from its pre-pandemic (February) level. Production rose in 15 of the 20 industrial sectors covered in August, with two others remaining flat in the month. Goods sector output climbed 0.5% on decent rises for construction (+1.5%) and manufacturing (+1.2%). Industrial production edged up 0.1%. Services-producing industries, meanwhile, experienced a 1.5% surge in production, with the steepest progressions occurring in arts/entertainment (+13.7%), accommodation/food services (+7.3%) and educational services (+3.4%). Year on year, total economic output was down 3.8%.
Canadian GDP registered yet another advance in August but the economic recovery remains highly uneven. Some sectors have now fully recovered from the COVID-19 shock and currently stand above their pre-pandemic peaks. That is the case for agriculture/forestry/fishing/hunting (+2.5% compared with February), finance/insurance (+2.1%), real estate (+1.5%), wholesale (+1.3%), retail (+1.2%) and utilities (+0.8%). That said, certain industries continue to suffer. For instance, production in the mining/quarrying/oil and gas extraction segment remains 17.2% below its February level thanks in large part to depressed energy prices. The sectors most affected by social distancing measures are also struggling to recover. Output in the arts/entertainment segment is roughly half what it was before COVID. Production in accommodation/food services, meanwhile, remains 28.2% short of pre-pandemic levels. Transportation and warehousing is also tracking 20.5% below February. While the economic rebound is likely to have extended into September Statistics Canada advance estimate suggests production expanded another 0.7% in the month the steep gap between the best and worst performing industries is likely to endure in a context in which people continue to avoid social contacts. Looking further ahead, the real question remains whether the recovery can be sustained, especially now that COVID-19 cases are surging back up, forcing some provincial governments to reintroduce social distancing measures.
Is the BoC Doing Enough?
There was no shock and awe in the Bank of Canadas overall set of communications this morning (here, here and here). In fact, the overall guidance appears to be well short of crushing it in my opinion. CAD was little changed in the aftermath of the communications, but it had been depreciating ahead of time with the driver being Covid-19 effects on global risk appetite. The Canada curve was also little affected post-communications with less than a basis point rise in the two-year yield.
Here is what they did on policy measures:
Purchases of Government of Canada bonds were reduced to at least C$4B/week which is down by $1B from previously.
GoC bond purchases will now be skewed toward longer-term bonds in the 3, 5, 10, 15 and 30 year segments of the curve but with MPR guidance (page 25) that purchases in the 3- to 15-year maturities tend to have the greatest effect on household and business borrowing rates. Watch for the next statements of operational details ahead of the next secondary market purchases of GoC bonds for elaboration on what they are targeting in what proportions.
Guidance on how long the purchases will continue remains vague and simply states they will continue until the recovery is well underway. Macklem has previously defined that point to be somewhere between the initial stages of recovery and closure of the output gap, though he did not repeat that today or offer anything else. For modelling their balance sheet Ive tended to assume until mid-2021 as a middle ground, but it could be longer.
Forward guidance was moderately strengthened. They did so by now attaching a statement-codified timeline to the closure of the output gap and achievement of the 2% inflation target sometime in 2023 until which rates will remain on hold. Previously they had indicated they would not hike until this was achieved but did not attach a timeline in the statement. This shouldnt really surprise many by way of new information. Its priced, and we had already largely figured this to be roughly the case.
source: Derek Holt, Scotiabank Economics