To state the obvious the coronavirus has changed the story for real estate and mortgages in 2020.
The reason the Bank of Canada is cutting rates is that the coronavirus is negatively impacting the economy – the is no escaping that fact. Things will eventually get back to normal, eventually, but in the short-term businesses and individuals will experience some financial pain.
The government has and will announce stimulus packages, but the reality is that there are limit to what governments and monetary policy can do here. There will be negative effects on employment and the economy.
Yesterday afternoon, lenders confirmed that Prime lending rates are dropping but at the same time the price that new consumers are going to pay for lending products will be increasing.
For variable rate mortgages, discounts from Prime rates are quickly disappearing for new loans. For existing variable rate mortgage holders and existing line of credits rates have been be decreasing. Keep in mind that during the Global Financial Crisis variable rate mortgages went from Prime – 1 % to Prime + 1% almost overnight.
As bond yields fluctuate and liquidity premiums start increasing dramatically, the cost of funds is increasing quickly. For fixed rate mortgages, lower bond yields do not translate to lower mortgage rates when the banks are short capital.
Bottom line is – Do not expect to see lower mortgage rates than we have today. (We current can offer 5 year fixed at 2.19% and variable at 2.15%)
OSFI has lowered capital requirements in order to increase banks ability to lend additional money. I expect additional support for the banks will be directed to supporting businesses and helping firms meet immediate business and payroll obligation.
Ensuring the financial system operates, protecting deposits, ensuring liquidity, and providing a means of support for business continuity are going to be taking priority over supporting the housing market.
Stay safe friends,