Canadian mortgage rates are increasing again, as economic and profitability concerns associated with the coronavirus crisis and lower oil prices outweigh aggressive monetary stimulus from the Bank of Canada.
Lenders had dropped rates to historic lows this month as the central bank twice cut its key interest rate, ultimately lowering it to 0.75 per cent, one of the lowest levels on record. But starting last week, mortgage lenders across the country began hiking again, according to James Laird, co-founder of mortgage comparison website RateHub.ca and president of brokerage CanWise Financial.
With Canadians losing their jobs, lenders are building a bit higher of a risk premium into their mortgage rate
James Laird, RateHub.ca
Best rates for a five-year, fixed-rate home loan have gone from around two to 2.5 per cent to between 2.5 per cent and three per cent, Laird said. One reason for the hikes is the recent economic uncertainty, he said. Forecasters have been adjusting their outlooks weekly, saying that a brutal, if short, recession is all but certain. The Conference Board of Canada warned Wednesday of the economy contracting by 1.1 per cent if travel restrictions and social distancing persist until the end of August.
“With Canadians losing their jobs, lenders are building a bit higher of a risk premium into their mortgage rate,” Laird said. “While this stuff is so fresh, and so uncertain, I think you can expect to see the upward pressure on mortgage rates until mortgage lenders feel like they have an understanding of what the new normal is going to be.”
The rise of mortgage rates, even from historic lows, could affect a housing market that has been an engine of economic growth for Canada. Housing has also been an area of concern for policy-makers, who up until recently were focused on restraining the impulse of households to own a home and take on debt to chase high prices. That concern has now been set aside to fight the crisis, as Bank of Canada Governor Stephen Poloz has said that one of the reasons he cut interest rates was to protect the housing market.
Orders for non-essential workers to stay home also could be pushing rates higher. Lenders have had to recently turn businesses into work-from-home operations because of the coronavirus, and a higher rate could slow down applications and allow them to catch up, Laird said. As well, a popular application processing system among brokers was recently disrupted for a few days by a cyberattack.
“But even with the shift up, today’s rates are still very low,” Laird added.
Mortgage rates rising from their historic lows might seem counterintuitive. After all, the Bank of Canada’s benchmark five-year mortgage rate fell to 5.04 per cent from 5.19 per cent as of March 18, which followed two rate cuts by the central bank and the Government of Canada’s five-year bond yield (a key reference for mortgage rates) falling below one per cent. Yet the benchmark mortgage rate represents a published rate most used by Canada’s six biggest banks, with borrowers typically being offered something lower.
Lenders have also been hiking fixed rates and shrinking variable rate discounts following the second Bank of Canada rate-cut on March 13, according to Robert McLister, founder of RateSpy.com. Competitive five-year fixed rates for loans not insured against borrower default, for example, jumped to 2.79 per cent from 2.49 per cent “and higher,” he added.
McLister said in an email that it was a “frankenstorm of factors” forcing banks to raise rates, such as concerns around the toll that the virus and the oil shock are expected to take on the economy, as well as the profits of lenders.
“Implied default risk surged, investors started forcing banks to pay more for mortgage funds and expected loan loss provisions spiked,” McLister wrote. “A plunging overnight rate, coupled with an equally falling prime rate, threatened to squeeze loan margins. And on top of it all, application volumes have been extreme, so there’s some demand-pricing going on as well.”
Analysts have been lowering their profit expectations for banks amid the coronavirus crisis, with Canaccord Genuity’s Scott Chan saying Wednesday that their initial forecasts suggest a 15 to 20 per cent “downside” on average to earnings per share over the coming year.
Banks have also been offering to allow customers to defer mortgage payments during the crisis, a largely unprecedented offer that underscores the seriousness of the situation — and one that was followed by borrowers flooding the lenders’ phone lines with thousands of calls.
“As this economic crisis goes on, there’s a good chance rates will drift somewhat lower,” McLister said.
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