mortgage rates in Canada

Your Mortgage Guide

[2020 Edition] What’s Going on With Mortgage Rates in Canada?

I expect the mortgage rates in Canada to stay as is, for many months into the future.  We have reached some sort of stability with the market and have a better understanding of what to expect going forward. Most of the chaos is now done, and we are creating a plan for the next 6 months to years in the future.

A Reuter’s poll of economists expects the economy to bounce back in the third and fourth quarter of 2020 and this negates any prediction of more rate cuts. Also, the mortgage rates in Canada are at their lowest and will remain the same to help in economic recovery.

Where Are We?

The COVID-19 disruptions have brought the economic activities in Canada to standstill leading to many believing that it entered a recession in the first quarter of 2020. It abruptly ended a favorable housing season set to ride on stable mortgage rates in Canada and brought down financial markets. According to the Bank of Canada, 20% home-owning households lack enough financial strength to pay for two months’ worth of expenses while mortgage arrears rate may climb up from 0.2% to 2.1% by 2021.

With the economy facing unprecedented set back due to the COVID-19 shutdown, the Bank of Canada has stepped up its efforts to ease liquidity support measures. Does this translate to more cuts in mortgage rates in Canada to bolster the economy?

I don’t think rates are going to dip further. The worst is over and the lockdown is at its last phase. After three successive rate cuts, the central bank refused to let rates climb down further. Though the Bank of Canada acknowledged a 30% annualized contraction in the national economy, it refused to let rates recede into the negative territory. It fixed the benchmark mortgage rates in Canada at 0.25% in March and has resisted all attempts to make more cuts since then.

Instead, the bank is focusing on the purchase of large-scale assets, including $10 billion corporate bonds and $50 billion provincial bonds. This clearly indicates there is no plan for easing mortgage rates in Canada in the future. 

Tiff Macklem, who is set to take charge of the Bank of Canada from June 3, has also hinted at a stop-start approach and more stimulus and infrastructure spending than rate cuts.

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Mortgage Rates in Canada Since COVID-19 Lockdown:

Rate cuts are the most visible reinforcements when an economic crisis hits. We have seen this time and again and there is no exception as coronavirus led to a severe economic slowdown. Let’s discuss what has happened with interest rates over the past three months.

After 17 months of keeping its benchmark rates stable at 1.75%, the Bank of Canada reduced it by 50 basis points in late February. It was triggered by similar cuts in other countries as the world began efforts to brace itself for the economic fallout of COVID-19. The bank lowered interest rates thrice, including two unscheduled cuts, and settled at a low 0.25% in March. The extraordinary move came to cushion the national economy reeling under a sharp drop in oil prices and the lockdown enforced by the COVID-19 pandemic.

However, the bank did not relent further in April with more rate cuts despite the economy receiving a severe hit. In May, it warned of rising household debts in the face of falling income level due to the COVID-19 impacts effectively denying any scope for rate cuts. Contrary to all expectations, this has led to an increase in the cost of the mortgage.

Discounts on Prime Rate Go with Reduced Mortgage Rates

Major lenders responded to the rate cut by the central bank but they removed discounts on the prime rate. It impacts existing floating mortgage rates and prevents those looking for variable mortgages or home equity lines of credit from cutting a good deal due to the rate cut.

Let’s find out what prompted the lenders to eliminate the discount on the prime rate despite reduced mortgage rates in Canada.

Though liquidity is easily available for banks, the funding costs for variable rates will add up in the next few months. Lenders see an increase in the average cost of funds once the economic activities resume and this pushes up the cost for variable mortgage rates in Canada. Due to economic lockdown, there is a shortage of deposits. Also, plunging earnings and slim profits make it difficult to offer discounts.

With mortgage defaults on the rise, lending has become riskier. This also plays a role in the removal of discounts despite a sharp fall in mortgage rates in Canada.

The drop in the prime lending rate affects existing variable mortgage holders the most. 

For example, take my case. I got a variable mortgage at 90 basis points less than the prime rate. So, my rate as of today is 1.55%, which is going to pay off the principal balance really quickly. Before the epidemic, the prime rate was at 3.95%. This means my rate was at 3.05%. Clearly, this is a substantial discount from where it was before.  And a huge win for me and anyone else with a variable rate mortgage.  This is just one of the reasons why I am a huge fan of variable-rate mortgages. This exactly happened in 2009 during the subprime mortgage crash.  Weird how history repeats itself!

To know which type of mortgage rates in Canada work the best, and how you can make the most of it, please reach out to me at vdass@yourmortgageguide.ca.

Low Mortgage Rates in Canada Fail to Improve Access to Money

COVID-19 has rendered millions unemployed and there is uncertainty on the economic front. More than 3 million have lost their jobs by April and another 1 million jobs are on the line of fire. About 1.3 million are without salary while close to a million are earning less than half of their income before the lockdown came into force. 

This has a ripple effect on mortgage repayment and the ability of applicants to pay back the loan. One in every 50 house-owners will struggle to maintain the mortgage payment schedule while 33% of households are short of money to fund their expenses for four months, according to a report by the Bank of Canada.

Lenders, wary of falling income levels and pink slips following the economic downturn have tightened the credit process. With the concern that the loan won’t become a bad debt, lenders are always going to be looking at your ability to repay the loan. This is certain to bring in more restrictions and push for greater underwriting making it difficult for many to access money and get financing despite reduced mortgage rates in Canada.

Though it has become harder to get mortgage finance, but all is not lost. You have still options, even if you are laid off. These are specific to individual conditions.

To know more, please get in touch with me by email or over the phone. We can discuss details, including potential options and future of mortgage rates in Canada. I will chat with lenders to get you a customized deal. There is lots of room for lenders to make changes, thus offering good deals to customers. I am planning a post on it soon.

What Happens to Mortgage Rates During A Recession?

As recession sets in, the monetary system faces a credit crunch marked by an increase in borrowing, low savings, and a decline in the lenders’ willingness to provide loans. While businesses seek credit lifelines to fund operations in the face of income losses, banks squeeze the lending to avoid loan defaults and bad debts. It necessitates the intervention by central banks to expand the supply of money by cutting rates. 

As soon as the specter of the recession was visible in 2008, the Bank of Canada went into action. In a series of steps taken between October 8, 2008, and April 21, 2009, it brought down the interest rates from 3% to 0.25%. However, unlike US and European central banks, it kept rates at lower bound than quantitative easing into the negative territory. Simultaneously, it ordered national banks to go for lower debt-to-equity ratios and avoid risky behaviors.

Going by the conditional commitment shown by the bank of Canada and its history of actions, it is certain that mortgage rates in Canada are going to stay the same to fuel economic recovery.

If you want more information on housing market trends, tips to get the best mortgage rates in Canada, or how to get a home equity line of credit, click here and I will help you out.