With Bank of Canada rate cut, sub-2% mortgages are coming to a bank near you
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By this time next week, Canadian consumers borrowing for a home might be looking at the lowest rates in the country’s history as a result of the Bank of Canada’s rate cut on Wednesday.
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Governor Stephen Poloz called the cut ‘insurance’ against low oil prices. Here are the bank’s top messages on how the oil rout could impact the economy Interest rates on the discount market are already 2.05% on a variable rate, five-year mortgage and 2.57% on a five-year, fixed rate mortgage, said Rob McLister, editor of Canadian Mortgage Trends.
“We haven’t heard from the banks yet,” he said, referring to whether financial institutions will match the central bank’s 25-basis point cut. Bank lending rates tend to move with prime which variable rates are tied to. “Historically it takes a day or two for them to move.”
With the average discount on a variable rate product 75 basis points, that means a 2% rate if banks move their prime rate to 2.75% from 3%. Based on the lowest variable available Wednesday, the 25-point reduction would result in a 1.80% rate.
But it’s not just floating rates that are about to fall. Bond yields have been sinking and Mr. McLister said the five-year fixed rate could be as low as 2.35% unless the banks decide to hold onto profits. “Bond yields have been falling like a knife,” he said.
All of this comes as the real estate market heads into spring market, which is its busiest time of the year — but comes as real estate price gains have begun to slow in a number of major markets across the country, if not Toronto and Vancouver.
Peter Norman, chief economist with Altus Group, said real estate prices have been flat but sales steady over the past six months.
We have a generation of Canadians that never experienced high or even rising rates “[Prices] have not been accelerating much beyond the rate of inflation,” he said, noting an index used by the Canadian Real Estate Association shows prices up just 0.65% over the past six months. “A decline in mortgage rates will probably create a little bit of extra stimulus.”
Canadians who do want to take advantage of the rate cut to move into a floating rate product will still be held back by rules Ottawa imposed to curb the housing by forcing people to qualify based on the five-year posted rate — now 4.79%.
About 28% of Canadians are in variable rate products, according to Will Dunning, chief economist of the Canadian Association of Accredited Mortgage Professionals.
“It’s been stable around that level for a long time,” said Mr. Dunning, adding only a large gap between variable and fixed causes people to shift.
One benefit of the cut could be that Canadians will use the lower interest payments to pay down principal faster, said Benjamin Tal, deputy chief economist with Canadian Imperial Bank of Commerce.
“We have seen before when people leave their payments unchanged but more of it will go to principal,” he said. “We should question the effectiveness of this move on housing. We have a generation of Canadians that never experienced high or even rising rates so for them those low mortgage rates are not as exciting as they were before. They are taken for granted.”
Phil Soper, chief executive of Brookfield Real Estate Services Inc., thinks central Canada, which is already benefitting in savings from lower gas prices, just got a further impetus to buy.
In the west, he thinks lower rates will provide a mitigating factor in a market which is expected to slow in the coming months amid lower oil prices.
On risk of government moving to further regulate the sector, he said the Greater Toronto Area is probably most at risk.
“I still believe prices will rise more modestly in 2014 [in Toronto],” said Mr. Soper, who doesn’t expect there to be a need for Ottawa to intervene.