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.
Last week Bank of Canada (BoC) Governor Poloz delivered his final speech and press conference before passing the baton to incoming Governor Tiff Macklem. I have always appreciated his ability to explain complex issues in plain-spoken terms and will miss hearing him at the podium.
His speech offered details of how the Bank grapples with monetary policy decisions in “unknowable times.” He walked listeners through examples of how the BoC has triangulated upside and downside risks during both the oil-price crash in 2015 and during the current COVID-19 crisis, using imperfect information and a wide range of forecasts. But it was his view of our prospects for recovery that seized the media’s interest.
Specifically, he said, “Because the [current] situation is more like a natural disaster than a recession, there is reason to expect confidence to be buttressed by fiscal income supports and a reasonably swift return to growth for significant segments of the economy.”
During his accompanying press conference, he added, “I do think that, on balance, the flow [of pessimism] that I’m hearing is a little too dire. It’s a little overblown.” Poloz believes that we are currently “tracking to our best-case scenario” and not to the worst-case scenario that many fear.
While I certainly hope that his forecast proves correct, I don’t think it is the most likely outcome.
Last week, Evan Siddall, CEO of the Canada Mortgage and Housing Corporation (CMHC), made a speech to our federal government’s Standing Committee on Finance, and in it he floated the idea of increasing the minimum down payment required to purchase a residential property from 5% to 10%.
His recommendation to restrict lending seems out of sync at a time when our policy makers have put their monetary and fiscal stimulus firehoses on full blast in their attempts to counteract the massive negative economic impacts of COVID-19 and the oil-price crash.
Before I offer my take on Siddall’s surprising proposal, let’s look at the highlights from his speech, which provided an update to the committee on “how CMHC is helping to stabilize Canada’s financial system and support the economic well-being of households and small businesses during the COVID-19 pandemic.”
I took the Victoria Day weekend off so there won’t be a new post this week. Instead, here are links to five of my most popular recent posts describing the unusual mortgage market we find ourselves in today and how best to navigate through it:
- Is now a good time to refinance your mortgage? This post shows you how to run the numbers.
- Debating between fixed and variable? This post explains why I think the five-year variable rate now looks like a slam dunk option for many borrowers.
- Wondering how mortgage lending will be change as a result of COVID-19? This post offers my take an includes tips for how to manage in the new lending environment.
- Thinking about applying for deferred mortgage payments? This post offers ten key points about deferred mortgage payment programs.
- Want to know more about the unprecedented steps our policy makers have taken to combat the negative impacts of COVID-19 and the oil-price crash on our credit markets? This post provides a detailed breakdown.
The Bottom Line: Five-year fixed rates dropped a little last week while five-year variable rates were unchanged. The drop in our five-year fixed rates was caused largely by a reduction in lender risk premiums this time, and not by a drop in the Government of Canada five-year bond yield that our fixed rates are priced on. This is a slow-moving trend that I expect will continue in the week ahead. See you next week.
Last Friday, Statistics Canada (Stats Can) confirmed that our economy lost another two million jobs in April, adding dramatically to the one million jobs that were lost in March. The latest data also revealed that 2.5 million more Canadians worked less than half of their normal hours over the past two months.
For context, Stats Can noted that our recent job losses now far exceed our previous record drop, which occurred during the 1981-82 recession. Back then, we lost a total of 612,000 jobs spread out over a 17-month span. We have just absorbed more than three times that many losses in a fraction of the time.
Our unemployment rate has now spiked to 13%, and that only counts unemployed Canadians who are actively looking for work. If we count unemployed Canadians who have given up looking for work, our total unemployment rate rises to nearly 18%.
The question for readers of this blog is, what are the implications for our mortgage rates?
I have been fielding a lot of calls lately from fixed-rate borrowers who are wondering if they could save money by breaking their current mortgage and switching to a lower rate.
Today’s post will walk you through some examples of borrowers who would, and wouldn’t, save money doing this in the current environment.
Evaluating whether now is a good time to break your mortgage boils down to five key factors:
- Current rate
- Current mortgage balance
- Remaining term and amortization
- Penalty to break (which can vary significantly) + any associated transaction costs
- The best available rate you are eligible for today
I will illustrate how this works by making some assumptions using the criteria outlined above.
Most of the borrowers I speak with these days are surprised to learn that mortgage rates are higher now than they were before oil prices crashed and the COVID-19 crisis began.
This is understandable.
Our five-year fixed mortgage rates are priced on the five-year Government of Canada (GoC) bond yield plus a premium of between 1.25% and 1.50%. The five-year GoC bond yield has plummeted of late and closed at 0.44% on Friday. In normal times, that would put our five-year fixed mortgage rates somewhere between 1.69% and 1.94%.
Our five-year variable rates are priced off lender prime rates which move in lock step with the Bank of Canada’s (BoC) policy rate. The BoC slashed its policy rate by 1.50% in March, and it now stands at only 0.25%. Five-year variable rates have also tended to float at between 1.25% and 1.50% above the BoC’s policy rate. In normal times, that would put the variable rates on offer in the 1.5% to 1.75% range. (Most variable-rate borrowers with existing mortgages have seen their rates fall to those levels, but the variable rates offered to new borrowers today are still north of 2%.)
To state the obvious, these are not normal times.
The Bank also released its latest Monetary Policy Report (MPR) but without its usual economic forecasts for foreign and domestic economic growth over the next three years. The BoC assessed the outlook as “too uncertain at this point” and decided that “it would be false precision to offer its usual specific forecast.”
No argument here.
The Bank did speculate that relative to the fourth quarter of 2019, our GDP dropped between 1% and 3% in the first quarter and will likely drop between 15% and 30% in the second quarter. On a related note, last week Statistics Canada confirmed that our GDP dropped by 9% in March, marking our steepest monthly decline since record keeping began in 1961.
Here are five highlights from the BoC’s latest policy statement and accompanying MPR, followed by my take on the implications for our fixed and variable mortgage rates.
Last week we learned that our economy lost slightly more than 1 million jobs in March.
Over that same period, another 1.3 million Canadians, who were technically still employed, earned no income and a further 800,000 Canadians worked less than half of their normal hours.
The March employment plunge more than doubled the consensus forecast of 500,000 jobs lost, and it marked our economy’s worst month, by far, since we started keeping records in 1976. (By way of comparison, our second worst month for job losses was 129,000 in January 2009.)
As the significant economic impacts of the lockdown begin to take form, now seems like a good time to speculate on how lenders will adapt their mortgage lending policies to the new reality.
Changes are already afoot.
If you need a mortgage now and you don’t already have a commitment in place, a variable rate seems like the clear choice – either for a purchase, refinance or renewal.
Normally I would hedge a little because every borrower’s circumstances are different, and I realize that some people just aren’t wired for variable-rate risk, but normal isn’t a word we’re using much these days.
To explain why I write that, let’s start with a snapshot of where rates are at the moment:
- Five-year fixed rates are now offered in a range between 2.64% and 3.09%. (Where you fall within that range depends on your loan-to-value ratio and whether your mortgage is eligible for default insurance.)
- Five-year variable rates are now widely available at anywhere from prime minus 0.30% to prime plus 0.05%, which works out to between 2.15% and 2.50%.
Both fixed and variable rates have moved higher of late.
My post from last week explains how we got here, but suffice to say, lenders have added significant risk premiums to their lending spreads. Gross spreads that are normally between 1.25% and 1.50% have been blown out to 2.00% to 2.50%, and that doesn’t seem likely to change until we are past the economic shocks of COVID-19 and the oil-price war.
Our policy makers have taken unprecedented steps to try to slow our infection rate to a level that our health-care system can cope with, a concept now commonly referred to as flattening the curve. At the same time, they are trying to minimize the economic trauma inflicted by the virus by introducing a broad range of fiscal and monetary policy actions on an unprecedented scale.
As extraordinary as these measures are, they seem entirely appropriate for an economy coping with both COVID-19 and a barrel of Western Canadian Select oil priced at $6.10 (when I last checked).
In today’s post I’ll detail how Canadian monetary policy entered a new phase last week and offer my take on the implications for our fixed and variable mortgage rates going forward.