The Canadian government is currently developing rapid responses and strategies to help mitigate the effects of the COVID-19 pandemic. Most recently, the Bank of Canada (BoC) cut the overnight lending rate by another 0.5% (otherwise known as 50 basis points).
Going from 0.75% to an all-time low of 0.25%, the BoC is seeking to support individuals and businesses by easing the cost of borrowing. For the average homebuyer, that means a change in the way we view and understand mortgage rates.
How This Affects Mortgages
Canadians have access to essentially two main types of mortgages:
A fixed mortgage rate is one that does not change over the entire course of the mortgage. Regardless of what happens in the outside market, a fixed mortgage is a good option if buyers are concerned about rates going up (or simply want to make stable payments).
On the other hand, a variable mortgage is one that is expressed as the prime rate plus or minus a certain percentage. As things change, and the prime rate goes up or down (as it is currently doing), your mortgage payments fluctuate in kind.
Variable-Rate Mortgages: Projections
Typically, variable-rate mortgages are priced based on a discount to the prime rate. Historically, this could average out at around -0.50% of prime (sometimes going up, sometimes going down).
In periods of extreme volatility, the discount to prime will start to disappear for mortgages or renewals (whereas existing variable-rate mortgages will retain whatever discount they initially received).
Given the current situation surrounding COVID-19, we are seeing extreme volatility in the variable-rate market. Those same discounts previously mentioned are disappearing, and many banks are moving to +0.25% of prime.
It is likely we may see +0.75% of prime in the near future. This is because banks are currently suffering due to mortgage rates locked in at a significant discount to the prime rate.
Fixed-Rate Mortgages: Projections
If you have a variable-rate mortgage that was secured before the pandemic, the wisest move is to cherish it. While banks may do whatever they can to lock you into a fixed-rate mortgage, your current situation is the best.
For any new clients pursuing a mortgage, the discounts to prime are currently disappearing at a rate that makes fixed-rate mortgages more appealing.
Historically, fixed-rate mortgages are priced above the Government of Canada’s bond yields. This means that fixed rates, in a normal market, may sit between 1.3% to 1.7% above where bond yields currently stand. Both fixed and variable rates are increasing, as lenders become more wary of mortgage defaults during uncertain economic times.
The Government of Canada has announced purchasing $150 billion in mortgage-backed securities through the CMHC immediately.
This will likely take some liquidity concerns out of the market and work to normalize things, but the intended effect may not take hold for some time.
How Should You Act?
The first thing to keep in mind is that you should only act with the help of a trusted team. We have access to lenders we trust, and can advise you in the process of securing a home that makes sense for your purchase and your future.
Rates are now at historic lows, and will remain that way for a while. Many buyers are taking advantage of these low rates, adding fuel to the market that will leave a lasting positive impact.
We are constantly on top of the market, especially as things are changing rapidly. You may need to move fast, but we ensure you do so with confidence.