15 Apr 2020 Canadian Mortgage News
The COVID-19 Impact on Mortgage Rates
As COVID-19 began to spread throughout Canada and the world, central banks responded by lowering benchmark interest rates. In an effort to encourage the economy, the Bank of Canada announced three separate rate cuts throughout March 2020, leaving the prime rate at its current 2.45%.
For Canadians currently in need of a mortgage, the Bank of Canada’s rate cuts provide optimism in a time of abundant financial concerns. But many borrowers aren’t receiving the trickle down of rate cuts from their lending institutions. With over one million Canadian jobs lost in March 2020 due to COVID-19, many lenders are anticipating the economic crash and soaring unemployment rates will drive some borrowers to default on their loans. As a result, Canadians are currently seeing mortgage rates from the Big Six banks increase to a range of 2.5% - 3%, as opposed to the 2% - 2.5% seen earlier in the year. Ordinarily with variable rate mortgages, a lenders’ prime rate would be accompanied by a discount (e.g. Prime rate 2.45% minus 0.50% = 1.95%), but with the current precarious economic landscape lenders are instead charging a premium on their prime rate (e.g. 2.45% plus 0.15% = 2.60%).
What Does This Mean for Borrowers?
In short, the objective of these actions is to limit the number of deals the banks will fund, while attempting to increase their profit margins on any deals they do fund (unless they default). As a result, borrowers are facing higher mortgage rates while facing greater stringency in gaining mortgage approvals.
As Canada’s economic environment gains clarity and confidence, borrowers can expect rates to begin to fall. However, while economic uncertainty continues at current levels, rates will remain higher (though still historically very low) and may fluctuate regularly. Banks may also seek to limit the availability of variable rate mortgages to ensure stability in their portfolio.
Should the pandemic persist for an extended period, variable rates will likely be the best choice for most borrowers. Current variable rates are running well below fixed and, in the event of a prolonged economic shutdown, the Bank of Canada will have no choice but to extend its ultra-low rate environment indefinitely. However, if control is gained over the virus in the short-term (within 3 months) and our economic situation begins to stabilize, a fixed rate will insulate a borrower against a return to a more normalized rate environment.
COVID-19 is a once-in-a-lifetime event and a very unique economic situation has emerged as a result; placing a bet on how long its impact will last is difficult to say the least, but is the most important consideration a current borrower needs to make before landing on the right product to meet their needs.