Bank of Canada (BoC) Governor Tiff Macklem recently said that in these “unusual times” his Bank is willing to be “unusually clear that interest rates are going to be low for a long time.”
The question that follows naturally is: How long is a “long time”?
Are we talking five years?
Most Canadian mortgage borrowers are choosing between five-year fixed and variable mortgage rates today, so that is the time period of most interest to them.
Today’s five-year variable rates are still lower, but they only have to rise by a little to become more expensive than their fixed-rate equivalents. The BoC will need to keep its policy rate at its current level for most of the next five years for variable rates to win out.
Last Wednesday the Bank of Canada (BoC) announced that it would hold its policy rate steady, as was universally expected.
In its policy statement, the Bank offered an updated assessment of the state of our recovery, and, by association, indicated where our mortgage rates are likely headed over the short and medium term.
Let’s start with a quick review to explain why the BoC’s words and actions are important to anyone keeping an eye on rates.
Last week was a quiet one in the lead-up to the Bank of Canada’s (BoC) meeting this Wednesday.
On Friday we learned that our economy recovered another 246,000 jobs in August, most of them full-time positions. A gain like that would normally push up our bond yields and, by association, our fixed mortgage rates, but at this point nobody needs to be reminded that these are not normal times.
Here are five quick thoughts on our current employment situation:
If you want to know where mortgage rates are headed, inflation holds the key.
If inflationary pressures remain low, the Bank of Canada (BoC) will keep its policy rate at its current 0.25% level for the foreseeable future and our variable mortgage rates, which are priced on the BoC’s policy rate, will remain at today’s rock-bottom levels for years to come. Against that same backdrop, our Government of Canada (GoC) bond yields, which our fixed mortgage rates are priced on, will either hold steady or continue falling.
If inflationary pressures build, GoC bond yields will increase, and the longer the bond, the more its yield will rise in response to changes in the outlook. Rising bond yields would increase lender funding costs which would, in turn, push fixed mortgage rates higher. Under this scenario, the BoC would likely be more patient than the bond market and allow inflation to run a little hot while determining whether the uptick would be sustained. But at some point, the Bank would start raising its policy rate to keep inflation on or around its 2% target, and variable mortgage rates would increase in lockstep.
Our policy makers have a love-hate relationship with our residential real-estate sector.
On the one hand, the sector has provided our economy with a consistent boost over a period when business investment and export growth have disappointed. But on the other hand, too much residential real-estate investment can be detrimental because the elevated debt levels associated with it can sap growth over time.
Balancing real estate’s risk/reward trade-off has been a tricky proposition for our regulators.
Mortgage rates continued to fall last week and the mortgage stress-test rate that is used to qualify mortgage applications also fell from 4.94% to 4.79%.
This marks the first drop in the mortgage stress-test rate since COVID began. By comparison, actual five-year fixed and variable mortgage rates have fallen by about 1% from their COVID-induced peak.
The disjointed relationship between real mortgage rates and the stress-test rate is a rich topic for discussion, but I am going to leave that for another day. Instead, in this week’s post I want to focus on a strange and controversial letter that CMHC’s outgoing President Evan Siddall sent to 100 lenders last week.
Canadian mortgage rates have been on a wild ride of late.
It started in late February when five-year fixed rates were available at about 2.75% and five-year variable rates were offered in the 2.90% range. Most borrowers were opting for the stability of a fixed rate against that backdrop, which had been in place for some time.
Then the crisis hit, and the Bank of Canada (BoC) slashed its policy rate by 0.50% three times in March, dropping it from 1.75% all the way down to 0.25%.
Variable mortgage rates initially fell in response, but then as the severity of the crisis became more evident, they started moving up instead of down. Here is a brief explanation of how and why that happened:
My next Monday Morning Interest Rate Update will be published on August 10. In the meantime, here are some of my recent posts that may be of interest (pun intended):
- This post provides links that will be useful to anyone who is actively looking to purchase a property.
- This post offers my take on the Bank of Canada’s latest policy-rate announcement and its surprising reassurances that mortgage rates will stay low for years to come.
- This post outlines a step-by-step process that existing fixed-rate borrowers can use to determine whether they can save money by refinancing.
My assistant, Melanie Haggerty, will be available in my absence, and I will update the rate table below next Monday.
COVID-19 is redefining the world as we know it.
Jobs. Trade. Rules for basic human interaction. They are all now in flux.
The Bank of Canada’s (BoC) unorthodox announcement last week was the latest proof.
Once again it kept its policy rate nailed to its 0.25% floor, as expected, and that left variable mortgage rates unchanged. But the Bank also made clear for the first time that borrowers could count on rates staying low for years to come.
The BoC has a well-earned reputation as a conservative central bank. It didn’t engage in any quantitative easing (QE) during the 2008 financial crisis, unlike so many of its counterparts, and since then it has been slower to cut rates and quicker to raise them. That’s what made last week’s Monetary Policy Report (MPR) and accompanying press conference commentary so surreal.
Our economy added 290,000 new jobs in May, which was a record monthly gain.
That record didn’t last long.
Last week, Statistics Canada confirmed that we more than tripled that total in June by adding another 953,000 jobs.
In normal times, that number of job gains would send bond yields soaring as the bond market priced in rising inflationary pressures and imminent Bank of Canada (BoC) policy-rate rises.
I’m sure you don’t need to be reminded that these are not normal times.
The spring real-estate market rush may have been late to arrive this year, but it is now in full swing. In the Greater Toronto Area, bidding wars are back, replete with face masks and COVID waivers.
With that in mind, and because it was a slow week for economic announcements and mortgage-rate news, today I am going to offer links to posts and calculators that will benefit anyone who is actively looking to buy a home.
In his first public comments since assuming his new role, Governor Macklem offered insight into the Bank’s approach to handling the crisis along with his take on the current state of our economy.
His overall outlook was notably less optimistic than that of his predecessor. Former BoC Governor Stephen Poloz recently opined that most economic forecasts were “a little too dire” and that fears were “a little overblown”, whereas Macklem readily conceded that our recovery from the current crisis would be “prolonged and bumpy”, and that we should expect there to be “lasting damage to demand and supply.”
In today’s post I will highlight four key details from his speech that will be of interest to anyone keeping an eye on mortgage rates.
Canadian mortgage rates continue to fall, and it now seems only a matter of time before they hit record lows, which I peg at about 2% for widely available five-year fixed-rate mortgages.
While the decline in mortgage rates has been hastened by the COVID crisis and the oil price crash, longer-term factors are also putting downward pressure on rates – and will continue to do so long after the current situation normalizes.
In today’s post, I’ll start by recapping how our policy makers’ actions have helped to reduce the crisis-related risk premiums that are still elevating lending spreads beyond their normal levels and inflating mortgage rates as a result. I’ll also highlight several longer-term factors that will combine to pull rates down for years to come. Then I’ll conclude by offering my take on how a declining rate outlook might guide borrowers who are looking for a new mortgage today or considering a refinance.
There is an annual tradition in the Canadian mortgage market whereby a large bank grabs the headlines with an eye-catching rate as soon as our spring real-estate markets kick into high gear.
True to form, now that our regional real-estate markets appear to be emerging from their extended COVID-induced slumbers, HSBC is offering a five-year fixed rate mortgage at 1.99% to borrowers who are putting down less than 20% of the purchase price of a property (commonly referred to as high-ratio borrowers).
Side note: If you’re wondering why smaller down payments come with lower mortgage rates, it’s because they also include borrower-paid default insurance premiums (which I outline in detail here).
In today’s post, I will use HSBC’s offer to illustrate why the terms and conditions in your mortgage contract can end up costing you much more than a small difference in rate over time.
Last week the Canada Mortgage and Housing Corporation (CMHC) announced several changes to its underwriting rules for mortgage-default insurance.
CMHC CEO Evan Siddal was itching to do something. He recently predicted that house prices could drop anywhere from 9% to 18% over the next year and floated the idea of increasing the minimum required down payment from 5% to 10%. (This post explains why I thought that proposal was ill conceived.)
The down-payment decision wasn’t his call, because it falls under the purview of the Ministry of Finance, but tightening CMHC’s own lending policies was a different matter.
The resulting changes surprised market watchers because they will make it harder for borrowers to qualify at a time when our policy makers, including CMHC itself, have flooded our economy with every type of stimulus imaginable in their efforts to counteract the negative economic impacts of the pandemic.
Last week’s announcement may also prove significant in another way.