One Big Step Closer To The Elimination Of The Toronto Land Transfer Tax!

July 15th, 2013

The City’s Executive Committee, chaired by the Mayor, recently debated options for phasing out the Toronto Land Transfer Tax. At this meeting, The Executive Committee decided to take the next step towards a phase-out by formally asking the City’s Budget Committee to consider phase-out options as part of the City’s upcoming budget setting process for the next year. This is a critical step in the right direction.

The Toronto Real Estate Board made a presentation to the Committee, at this meeting, and spoke strongly in support of a phase-out of this tax.

Bond Yields Increasing

July 2nd, 2013

Bond yields have been going vertical.

By early Thursday, the 5-year yield—which influences long-term fixed rates—was up as much as 20+ basis points in less than 48 hours. That’s an unusual move and it was driven by optimistic economic comments from the U.S. central bank.

This spike in yields has led dozens of lenders to announce fixed rate increases. The most notable today was RBC, which is boosting certain discounted fixed rates by 20 basis points on Monday.

But it’s not only bond yields that are flying. So is the 5-year swap spread, and that also has mortgage rate implications.

Swaps Basics

A “swap” (interest rate swap) is an agreement to exchange two different types of interest payments: fixed-rate payments and floating-rate payments. Financial institutions buy swaps to hedge interest rate risk and lock in profits.

A simplified example of hedging: A bank with 5-year fixed mortgages receives fixed-rate payments from borrowers. That same bank also has short-term deposits. If short-term rates rise, the bank would have to pay higher rates to depositors, but be left with the same fixed rate payments from its mortgages. To solve that problem, the bank buys a swap that lets it receive floating-rate payments (at a higher rate than it has to pay out to depositors). In exchange, the bank must give its fixed-rate payments to the swap seller.

Why swaps matter

The difference between the 5-year swap rate and the 5-year government yield is called the “swap spread.”

When the swap spread gets wider, fixed mortgages can become more expensive to hedge, other things being equal. That often happens when bonds sell off and yields soar. Lenders then pass along that added cost to borrowers.