Canadian mortgage rates are falling as interest rates fall


What is bad news for some is good news for others, and Canadian mortgages are the unexpected beneficiaries of some gloom that lingers over Canada's economy.

Fixed mortgage rates have been falling sharply in recent weeks as the cost of financing these loans has become cheaper. Banks and other lenders get the money they lend on mortgages by lending them to the bond market, and five-year bond yields have been falling since May 2018.

A five-year Canadian government bond yielded only 1.45% on Monday. This is the first time that the value is below 1.5% since the summer of 2017.

Last week, the interest rate curve on long-term versus short-term loans reversed, a rare event that has an unusual talent for predicting recessions. (For a longer explanation of what an inverted curve means, read this.)

Bond yields are shrinking in large part because investors think the outlook for the economy looks weak, so they expect interest rates to begin to fall.

Lower bond yields are generally "not a good sign from an economic standpoint," says Janine White, vice president of rate comparison website,, "but it's great for mortgages."

That's because cheaper financing costs are allowing banks to reduce their mortgage rates to try to attract borrowers. CBC News reported in January that the Royal Bank cut its five-year rate to 3.74%, a move rivals should equalize.

Royal Bank cut that rate two more times, first 10 basis points on March 1 and then another 15 basis points on March 13. The bank's five-year fixed rate now stands at 3.49%, and other lenders are in fact following suit.

Banco TD currently has a special five-year fixed rate of 3.49%. Smaller lenders are even lower. Dominion Loans Centers are offering 3.29% blocked for five years, while HSBC Canada has a special year of 3.24% at the moment.

Variable rates in motion also

And it's a similar story on the variable rate side – albeit for different reasons.

Unlike fixed-rate mortgages, which are based on the bond market, variable rate mortgages tend to move in tandem with whatever the Bank of Canada is doing.

And investors are betting that the central bank will soon reduce its rate, not up. Investors in financial instruments, known as overnight swaps, are evaluating a zero possibility of a high this year, but about a five-fold chance of a cut through July, and a chance of up to 44% by September.

White says the variable-rate mortgage market is simply pricing on some of the negative economic indicators of the afternoon, including lower inflation and an anemic GDP figure that showed Canada's economy has actually shrunk by 2018.

"There is a greater likelihood that they will actually cut to try to stimulate economic growth," Mr. White said of his expectations for Canada's central bank.

One of the biggest changes that occurred in our quarterly projection for March was the removal of any further hikes in interest rates from our outlook.– the chief economist of Banco TD, Beata Caranci, in a note

And economists are predicting the same thing.

"One of the biggest changes that occurred in our quarterly projection for March was the removal of any further hikes in interest rates from our outlook," said TD Bank chief economist. Beata Caranci said in a note on Monday. "We pressed the stop button."

Variable rates did not stop rising, they have changed to the contrary and have fallen in some cases. Rates below three percent are now common, both in large banks and in alternative lenders.

Spring is always a key moment in mortgage markets. This is because most home purchases happen in those months, so lenders try to compete as much as possible in fares to give a bite as big as possible to that company.

Given that, the sudden trend for cheaper loans could get a little out there, says White.

"Are we still going to raise interest rates in the next two years? Yes," she says. "[But] for the rest of 2019, the forecast is that the variable rate will be stable and may have a chance to fall. "


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