The last month as been one of the most interesting we’ve ever seen in the mortgage industry. We saw the Bank of Canada cut their overnight rate by a whopping 1.50% over three announcements, two of which were unscheduled. This brought their overnight rate down to 0.25%, which is the rate that the banks use to set their prime rate. The prime rate affects those with variable rate mortgages and HELOCs (Home Equity Line of Credit). They generally to not have a direct impact on fixed mortgage rates, although they can have an indirect effect on them.

In fact, fixed mortgage rates can move in the opposite direction as we saw on March 13th, which was the date of the first unexpected rate cut by the BOC. While they were announcing the rate cut, bond yields took off in the opposite direction, placing immediate upward pressure on fixed mortgage rates. While the BOC rate dropped, many lenders immediately announced increases to their fixed mortgage rates by as much as 0.25%. It’s quite rare for them to move in the opposite direction, but it can happen.

 

This Morning’s Interest Rate Announcement

This morning marked the next scheduled rate announcement by the Bank of Canada. It was quite possible that they were going to follow the US lead and cut their rate down to 0%, however they chose to keep things status quo. For now anyway. They still may cut it down further, but they’ll try to hold off as long as they can before doing so.

The prime rate remains at 2.45%.

Over the past few weeks, mortgage lenders have been reducing their variable rate discounts, with many lenders replacing them with premiums. The big banks sitting with discounted variable rates around prime +0.20% (2.65%) right now. There are however some lenders who are still offering as low as prime -0.40% (2.05%) for some situations.

 

Why Mortgage Rates Were Increasing

One of the reasons why rates were rising, both fixed, and the reduction of discounts on variable, was due to a potential liquidity issue surrounding mortgages. Liquidity is basically the availability of funds to lend on mortgages. Fortunately, the government is introduced billions in stimulus, which was helped with mortgage liquidity. This was a contributing factor in stabilizing mortgage rates.


Following this morning’s announcement, the bond yields dropped considerably, which is now placing downward pressure on fixed rates. Right now, the lowest 5 year fixed rates range from 2.54% to 2.79%, depending on your situation. We’ll likely see rates drop further within the next few days.

 

There Is Room For Mortgage Lenders To Offer Lower Rates… So Why Don’t They?

Based on bond yields, fixed mortgage rates are currently higher than they should be. There is room for mortgage lenders to drop rates further, but they are reluctant to do so. The reason for the reticence is related to extreme market and economic volatility. Large, unexpected swings in the market have become common place, which is scary to anyone lending out money. For this reason, they have to be cautious.

 

COVID-19’s Effect On Our Economy and Future Mortgage Rates

The COVID-19 pandemic has had a significant impact to the economies of pretty much every country around the world. It will get worse before it gets better unfortunately. Even when the curve flattens and subsequently drops, it will still be months before things return to normal. The longer this plays out, the harder it will be to return to normal. We’ll get there though!

Until then, the economy will continue to suffer. As long as this persists, we can expect mortgage rates to remain low, which I expect to be the case for years to come. I would say that it will be at least two – three years before we see an increase to prime rate. It’s likely it will remain at this level for longer. Time will tell of course.

Fortunately, the government continues to provide economic stimulus, and has introduced several programs for those financially impacted by COVID-19. This is something that we are all in together, and it’s something that we’ll get through together. It’s a challenging time, and when it’s all over, we should come out stronger than ever before.

The next scheduled rate announcement from the Bank of Canada is June 3rd, 2020.

Stay safe everyone!

 

 

Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank
– How to Win The Mortgage Game in Canada, and has ranked as one of the top
75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage
Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on
season two of TV’s Top Million Dollar Agent.