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When Government bonds are decreasing in value , its normal for mortage rates to decrease also. but recently since the economy is weak and inflation  cost is high they have to increase interest rates to make profit . This breaks the norm of weaker economy lower inflation cost.

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Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time.

Three of Canada's biggest lenders have raised mortgage rates and more increases are expected as new regulations, a weak economy and higher costs prevent banks from capitalizing on lower borrowing rates in the debt market where they finance their mortgages.

"When you look at the funding picture, it's getting more expensive for the banks," Meny Grauman, a financial analyst at Cormark Securities in Toronto, said by phone Wednesday. "We've started to see cracks in credit and we know that's probably going to continue to intensify. If it continues, the same logic that caused the banks to raise will continue to apply."

The higher mortgage rates add to measures by the federal government and the national housing agency to cool the housing market, which the Bank of Canada has identified as one of the major risks to the economy. Housing prices in Vancouver and Toronto have almost doubled in the past decade, raising concern that a market crash could lead to a rash of loan defaults.

Even as speculation mounts the Bank of Canada could return interest rates to a record low this year, homeowners face higher mortgage costs as the banks look to protect their bottom lines in a deteriorating economy. This week, Royal Bank of Canada became the latest lender to raise its mortgage rates, following Toronto-Dominion Bank and Bank of Nova Scotia.
Rate cut
Yields on five-year benchmark government bonds, the part of the market where banks usually fund their mortgage lending, touched the lowest since August on Wednesday as new signs of slowing growth in China pushed the price of crude oil below US$35 per barrel. That led derivatives traders to assign a more than 50 per cent chance the Bank of Canada will cut the benchmark interest rate to its record low of 0.25 per cent by mid-year.

The only other time Canada's benchmark interest rates were that low was 2009, and it kicked off a housing boom fueled by rising oil prices and cheap mortgage rates. This time around, bond yields are falling because the economic trouble is hitting much closer to home, with a deteriorating outlook for exports along with an inflated housing market.

The banks are feeling the pinch with higher borrowing costs as pressures on the economy make them look less credit-worthy. Investors now demand about 129 extra basis points of yield to hold five-year bonds from top-rated Canadian banks compared with government benchmark notes, the biggest premium tracked by Bloomberg data since 2010. That premium was 51 basis points at the end of 2009.
Paying up
"Given the Canadian banks are a play on the Canadian economy, a slowdown in the economy can't really be seen as positive for the banks," Kris Somers, a Canadian debt analyst at Bank of Montreal, said by phone from Toronto. "Banks are paying more money for debt than they have in the past."

In addition to the higher borrowing costs generally, new government rules are also imposing higher costs on mortgage lending. Canada Mortgage & Housing Corp. increased the fees it charges banks to securitize mortgage debt and the Department of Finance increased the minimum down payment requirement for insured mortgages. The Office of the Superintendent of Financial Institutions, the bank regulator, also proposed higher capital buffers to back the loans. Canadian lenders hold 75 per cent of the country's mortgages.
Margin buffer
With the bank increases, the rate on a five-year fixed mortgage at Royal Bank rises to 3.04 per cent on Jan. 8, from 2.94 per cent. The five-year variable rate, tied to the bank's prime rate, rises to 2.6 per cent from 2.45 per cent. Toronto-based Royal is the country's No. 2 bank by assets.

The government announcements were made to cool a housing market that's been on a tear, with housing prices nationwide rallying 27 per cent in the last five years, according to the Canadian Real Estate Association. Vancouver and Toronto have outpaced other cities, prompting concern from the Bank of Canada and Fitch Ratings Inc., among others. Home sales flew to a record in Toronto and Vancouver in 2015 and prices continued their climb. The average price rallied 9.5 per cent to $609,110 in December in Toronto and jumped 19 per cent to $760,900 in Vancouver, according to those cities' real estate boards.

The trend of banks maintaining a margin buffer even with lower costs in the public debt market started last year, when the Bank of Canada cut its overnight lending rate and the banks didn't pass the full savings onto consumers through their prime lending rate. The prime rate is used to price everything from variable mortgage rates to lines of credit. The same thought process prevails this year, Grauman said, as banks try to eke out profit in a tough economic environment.

"'Flat' is the new 'up,'" Grauman said. "You're just trying to hold the line on your margin."
Bloomberg News

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Why homeowners and buyers can expect more mortgage rate hikes from the big banks

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Falling government-bond yields are usually good for homeowners in Canada because mortgage rates tend to follow suit. Not this time. Three of Canada's biggest lenders have raised mortgage rates and more increases are expected as new regulations, a weak economy and higher costs prevent banks from capitalizing on lower borrowing rates in the debt market where they finance their mortgages.

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Short term mortgages can be a good choice if your think a large change in inflation , economy or interest rates are going to happen in a years time . There are multiple pro and cons of short term mortgages such as , interest rates decrease you can get a new rate in a short amount of time   . the cons are when your short mortgage is up for renewal you may not get a good deal .

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It has become a lot tougher to make sense of mortgage rates in the past few weeks.

With Canada in the midst of economic misfortune (the decimation of its oil industry), inflation expectations are falling. That usually leads to a drop in mortgage rates. But in today's bizarro world, the usual is not happening.

What we're actually seeing is banks moving rates up. In the past week alone, advertised mortgage rates have jumped 0.10 to 0.15 percentage points at our Big 6 banks. That has surprised and confused not only borrowers, but many mortgage professionals.
What's behind it
If you're trying to make sense of it all, the first thing to understand is why banks hiked rates in the first place. It's a combination of six things, say lenders:

1. Rising short-term rates;

2. Investors demanding higher yields from mortgage lenders;

3. Provision for higher potential mortgage losses;

4. Preparation for potentially falling rates (which hurts bank margins);

5. Less demand from mortgage investors;

6. Preparation for upcoming regulatory changes, which will make lending more expensive.
What happens next
The reasons above will likely keep variable-rate discounts skimpy for the foreseeable future, at least at the major banks.

For fixed rates it's a different story. Unlike variable rates, which are funded by short-term debt and deposits, the cost of fixed-rate mortgages is tied to the bond market. That's good news for mortgage shoppers because bond yields are near all-time lows.

For now, cheaper funds in the bond market are offsetting the six factors above. That's why we're seeing lenders trim fixed rates as we speak. This doesn't rule out higher rates down the road, but it does mean that you don't have to panic about locking in.
Where the bargains are
Last September you could walk into any bank and get prime minus 0.55 per cent on a variable-rate mortgage. Nowadays, you'd be lucky to get prime minus 0.25 per cent.

If there's one piece of advice I can offer you, it is this: Ignore variable rates worse than prime minus 0.50 per cent. They're just not worth it. Variable-rate lovers are better off in a one-, two- and three-year rate. (This assumes you're getting a new mortgage. If you already have a great variable rate, like prime minus 0.75 per cent, hold on to it like a winning Powerball ticket.)

Choosing a variable at prime minus 0.50 per cent (i.e., 2.20 per cent) or worse means you'll likely pay more, even if the Bank of Canada cuts its key lending rate to zero. The reason: Shorter terms have much better rates and banks probably won't pass along more than 60 per cent of any Bank of Canada rate cut - assuming the past two cuts are a guide.

Knowing this, it's easy to model how different mortgage terms perform in that scenario. Let's assume, for example, that the Bank of Canada responds to the current economic risks by slashing its overnight rate by one-half percentage point. Then, two years later, the economy perks up and rates jump 1.5 points.

Mathematically speaking, which term wins in that situation?

Given a well-qualified borrower, a 25-year amortization and current mortgage rates, the answer is a one-year fixed.
The one-year edge
One year rates should perform best in this environment for four reasons:

1. At 1.99 per cent, give or take, they're the cheapest rate in the market (and equivalent to prime minus 0.71 per cent);

2. If rates fall as many expect, you'll potentially renew even lower in eight or nine months (I say eight or nine months because most lenders let you hold a new rate for 90-120 days);

3. Thanks to the economic cataclysm occurring in commodities, your renewal risk is limited - i.e., there's very little chance of significant rate increases in eight to nine months;

4. A one-year term provides maximum flexibility because you can renew into any other term and any other mortgage type, depending on the rates and your personal circumstances at the time.
Things to watch out for
Mortgages are like gloves: One does not fit all. If you do opt for a one-year term, keep three things in mind:

1. Your lender may not offer you a great deal on renewal, forcing you to change lenders;

2. If you're switching lenders, find one that covers your legal, appraisal and title insurance fees. Note: That's not usually possible if you have a secured line of credit;

3. Unless you need to borrow more within 12 months, avoid "collateral charge" mortgages, which make it more expensive to switch lenders at renewal.

Short-term mortgages are best suited to those with good credit, a reasonable debt load and stable, provable income.

By contrast, you may need the security of a longer fixed rate, or want a rate you can set and forget for four to five years (renewing does take three or four hours of your life, after all). Or maybe you simply can't qualify for a one-year rate, since lenders make you prove you can afford payments based on the posted five-year rate (currently 4.64 per cent).

In my case, I make regular sacrifices to the mortgage gods, thanking them for the prime minus 0.80 per cent variable my wife and I got last September. Sadly, they don't make those any more, but one-year terms are the next best thing.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder of RateSpy.com. You can follow him on Twitter at @RateSpy

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Why a one-year fixed mortgage is your best bet

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It has become a lot tougher to make sense of mortgage rates in the past few weeks. With Canada in the midst of economic misfortune (the decimation of its oil industry), inflation expectations are falling. That usually leads to a drop in mortgage rates. But in today's bizarro world, the usual is not happening.

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Inflation and the state of the Canadian government are not the only things that effect our mortgage rates . A lot of worldwide events effect our mortgage rates such as our neighbor the United States Economy effects ours greatly , The Slowing of the growth of Chinas Economy and the Low prices of Oil all effect our mortgage rates.

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Dave Larock in Interest Rate Update, Mortgages and Finances

Editor's Note: The Interest Rate Update appears weekly on this blog - check back every Mon morning for analysis that is always ahead of the pack.

In today's post I'll outline the five key factors that I think will most likely determine the path of Canadian mortgage rates in 2016.

Before we do that though, let's revisit the post I wrote on the same topic at the start of the 2015 to see how those factors have played out over the last twelve months.
Recap of the Five Factors That I Predicted Would Drive Canadian Mortgage Rates in 2015

1. The strength of the U.S. economic recovery - The U.S. recovery eventually found a more solid footing in 2015, and as predicted, the Fed's December rate rise did pull Canadian bond yields higher in sympathy. That said, because the first U.S. rate rise happened so late in the year, the impacts of the Fed's first monetary-policy tightening in almost a decade have yet to be fully felt.

2. Slowing growth in China - Slowing growth in China did put downward pressure on commodity prices. The knock-on effects for our economic momentum were mostly negative, and as expected, China's slowing growth did indirectly exert downward pressure on our mortgage rates.

3. The continuation of large-scale quantitative easing (QE) programs - The European Central Bank (ECB) finally backed up its words with action and launched QE programs in early 2015, and Japan also expanded its use of QE (again) last year. While China has not officially engaged in QE, it has adopted QE-type policies, for example, by making it easier for their commercial banks to lend more aggressively. China has also continued cutting interest rates, which it still has room to do because its benchmark one-year lending rate sits at a relatively lofty 4.35% today. That said, if China's growth continues to slow and the country experiences turbulence as it transitions from an export-led to domestic-consumer-led economy, it's not hard to imagine China adopting full-blown QE if needed. In summary then, the continued wide-scale use of QE and QE-type monetary-policy initiatives exerted downward pressure on global bond yields, as expected, and these developments helped keep Canadian mortgage rates at ultra-low levels.

4. The price of oil - Lower oil prices exerted downward pressure on our mortgage rates and their sharp fall dealt a body blow to our economic recovery. This made the Bank of Canada (BoC) increasingly cautious, which was expected, and led to two cuts to the BoC's overnight rate, which was mostly unexpected.

5. The potential for the next financial crisis - The global economy made it through the last twelve months without experiencing a significant financial crisis, but the worry list of the potential risks to global economic stability is still a long one. More on that for this year below.

Not surprisingly, there is some overlap between last year's key factors and those that will be most important heading into 2016. Here is this year's list:

1. The strength of the U.S. recovery - When you export about three quarters of what you sell abroad to one country, your economic momentum will always be tied to theirs. The challenge for Canada today is that our economy seems more highly correlated with negative U.S. economic shocks, which we feel almost immediately, and not nearly as highly correlated to positive changes in U.S. economic momentum. This is in part because other countries that export to the U.S., like Mexico, have become more competitive and are taking share away from Canadian exporters, and also because our export sector is still in the process of reinventing itself after having been decimated in the initial years following the Great Recession. Against this backdrop, the impact of the relatively cheaper Loonie is muted because our current export-sector challenges are more structural than cyclical. That said, if the U.S. economy continues to gain momentum, it will give our economy a tailwind that will grow in strength as our export sector re-emerges from the ashes of its former self. But this will take time and I think that the BoC will continue its cautious monetary-policy approach in the interim, which should help keep a lid on our mortgage rates in 2016.

2. Commodity prices - Our economic momentum is also highly correlated with the direction of commodity prices, and most especially, the price of oil. When oil hovered in the $100/barrel range, it gave our economy a big boost in the initial years following the Great Recession, and the oil industry and its related sectors drove the majority of our employment growth and business investment over that period. In the new era of oil in the $40/barrel range, and falling commodity prices generally, our economy must now find new sources of momentum. This is easier said than done, as noted in my comments about the slow pace of our export-manufacturing recovery in the paragraph above. If commodity prices stay at today's levels or fall further, I expect that the BoC will keep its monetary policy at today's ultra-accommodative levels while it waits for new sources of positive economic growth to emerge.

3. Global instability - When global instability risks rise, everyone becomes more cautious. Our policy makers are reluctant to tighten monetary policy when instability risks are heightened, and investors undertake a flight to safety as the return of their capital becomes more important that the return on their capital. Both of these developments help keep our mortgage rates from rising (although many would trade this silver lining in exchange for clearer economic skies). I think the biggest threat to global stability in 2016 will come from the euro zone, which is grappling with a crisis that the ECB can't print its way out of this time. Specifically, the euro zone is now being undermined by disagreement between its member countries on the handling of the Syrian-refugee crisis. The political cost of ceding control of each euro-zone country's monetary and fiscal policies to Brussels was already high, and the added cost of allowing Brussels to meddle with each member country's immigration policy will test the courage of incumbent politicians across the region and embolden the nationalist parties that seek to replace them.

4. Inflation - Inflation has been benign for so long that it may be hard for some people to imagine that a central bank would have to raise its policy rate to control it, but we are seeing costs rise in some key areas. For example, U.S. and Canadian labour costs outpaced overall inflation in their respective countries in 2015. Rising labour costs have been offset by other factors, such as lower commodity prices - but commodity prices aren't expected to fall much further and labour cost inflation is typically stickier, which means that the upward pressure on inflation could prove more persistent throughout the coming year. While I don't think that we'll see significantly higher U.S. and Canadian inflation rates in 2016, if we do, this development alone could force the Fed and/or the BoC to raise rates to maintain price stability. For that reason, inflation is an important factor to watch for anyone keeping an eye on Canadian mortgage rates, even in its largely subdued current state.

5. The value of the Canadian dollar - The Loonie has fallen by nearly 30% against the Greenback over the past two years, and while a cheaper Loonie is widely credited with making our exports more competitive, this doesn't provide the full picture. For example, our exporters often import materials, which they use to manufacture their products. When the Loonie falls, it means that these companies must absorb higher costs first, before hoping to recover them in the form of increased sales later. Furthermore, while our economy can adjust to changes in the value of the Loonie over time, a 30% drop over two years is a significant move and if the Loonie continues to depreciate, it could create a destabilizing effect. If that happens, the easiest way to reverse the Loonie's momentum is for the BoC to raise its policy rate, and while that seems highly unlikely given that the Bank supports the Loonie's current downward path (despite its claims of indifference), at some point it may not have a choice. For example, if the Fed raises its policy rate faster than is expected, the Loonie could continue to depreciate to the point when the BoC has no choice but to tighten its monetary policy in order to stop the bleeding.

Five-year Government of Canada (GoC) bond yields closed at 0.73% last Friday. Five-year fixed-rate mortgages are available in the 2.59% to 2.74% range, although the major banks are advertising much higher rates so it pays to shop around. Five-year fixed pre-approval rates are offered at rates as low as 2.79%.

Five-year variable-rate mortgages are available in the prime minus 0.50% to prime minus 0.35% range, which translates into rates of 2.20% to 2.35% using today's prime rate of 2.70%.

The Bottom Line: The start of the new year is a good time to assess the key factors that will determine the direction of our mortgage rates over the next twelve months. While factors like $40/barrel oil, continued global instability risks and benign inflation rates in both Canada and the U.S. hint that both our fixed and variable mortgage rates should remain near today's levels for the foreseeable future, wildcards like the plummeting Loonie and the Fed's tightening timetable should keep us from becoming too complacent when putting our money where our mind is.

David Larock is an independent mortgage planner and industry insider specializing in helping clients purchase, refinance or renew their mortgages. David's posts appear weekly on this blog, Move Smartly, and on his own blog: integratedmortgageplanners.com/blog Email Dave

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Five Factors That Will Drive Canadian Mortgage Rates in 2016

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Dave Larock in Interest Rate Update, Mortgages and Finances Editor's Note: The Interest Rate Update appears weekly on this blog - check back every Mon morning for analysis that is always ahead of the pack. In today's post I'll outline the five key factors that I think will most likely determine the path of Canadian mortgage rates in 2016.

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The bond market is intertwined with interest rates . When inflation increases the initial value of the bond decreases and the initial interest rate on the bond may not be enough for the bond owners . They need higher interest rates to make money so this increases the interest rate on new mortgages.

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Vancouver Real Estate Mortgage Calculator Q&A

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http://ElizabethRoseBlogs.com - Elizabeth Rose shares how inflation affects mortgage rates

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When US job are on the rise so is the US Economy . This also increases inflation and mortgages. This video also shows that a lot of what happens to our Neighbouring nation also effects us in Canada .

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How Strong US Jobs Data Affects Mortgage Rates

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US Jobs numbers came in at 288K, a really strong number. But is a stronger economy just going to drive up interest rates and potentially mortgage rates? MaryAnn asks James Marple, Senior Economist, TD Bank Group, what this number means and how it may affect mortgage rates, wages and the US economy.

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This video is a basic explanation of inflation and its effect on mortgage rates/ economies .  It also goes over Economic bubbles . If the Economic bubbles "burst " they can cause some serious problems such as price crashes and job loss.

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Inflation and Bubbles and Tulips: Crash Course Economics #7

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This picture shows that there is a relationship with inflation and the economy . As one rises the other one falls.

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What is easier for you to afford  ? stronger economy and higher inflation  , so you make more money but expenses are higher but interest rates are lower. Weaker economicy , cheaper expenses but higher interest rate.

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Interest rates , economy  and inflation are all connected , its a constant cycle that effects each other .

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Attached is a wordfile document .