Addressing Recent Controversy With Lending Rates

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The crisis is still far from over and we are all trying to figure out the present and future of our economy – and a big part of that includes mortgages. If you’re currently a homeowner paying off a mortgage, you are just as concerned as us, the mortgage professionals.

Thanks to our friends at thestar.com, this is an informative and very long read. Enjoy!

A second surprise rate-cut this month from Canada’s central bank has mortgage experts reluctant to predict what’s next for consumers, who are anxious and frustrated from lost income during this pandemic.

The BoC’s decision to lower its key rate to 0.25% weeks ago was primarily aimed at easing the economic shocks of containing the virus and dipping oil prices — but its effect on mortgage rates is not really making sense.

Paul Taylor, CEO of Mortgage Professionals of Canada, says there could be a slight reduction in mortgage rates but not immediately because the banks’ margins on mortgages are already thin and investors are demanding such rates of return; and there isn’t even enough money to go around.

“So consumers may not see an immediate pass-through of the rate reduction that occurred today,” said Taylor. “If the market remains turbulent, they may not see any of it.”

Banks and major lenders announce whether they will move their rates in response to the Bank of Canada’s can take about 3 business days.

Around March 17, the best fixed rates being offered by most lenders were between 2 and 2.5%. Just over a week later, those had gone up by an average of 0.5%. Experts are finding it hard to predict what will happen in the coming weeks and months.

What the bank rate means to different borrowers varies depending on whether a consumer holds a loan already or is applying for a new one.

“Everyone’s complete financial picture has probably changed a lot in the last two weeks. The mortgage is only one part of the whole household finance picture,” one expert said.

Those with variable rate mortgages and loans such as HELOC are supposedly the best off. They have already seen a full 1% drop this month and it’s likely they will benefit by the latest 50-point fall.

“Prime is likely going to be 2.45% if lenders pass along the entire 50 basis points. A lot of Canadians have something like prime -1%. Many Canadians’ variable rate mortgage will certainly be less than 2% and a lot of them will be around 1.5% — really cheap money,” they said.

Important to note: For those who are applying for new loans, variable rate discounts have been shrinking and fixed rates have been rising.

“Even though logic suggests they should drop, the history of the last three weeks suggests that might not happen. It’s possible they stay the same or they go up,” they added.

Fixed rates are more difficult to analyze. Typically the central bank cut would result in reduced fixed-rate loans. But since recently lenders have been inserting an unusual “fixed-rate premium” into their mortgage pricing.

Those who believe Canada is heading for a long recession may expect the variable rates to stay low. Consumers who expect the country to rebound later this year or early next year could lock in a fixed rate, because, when the economy improves, variable rates will rise.

“The bank has extended an extraordinary monetary stimulus to deal with this extraordinary time. When the extraordinary time is over, you can expect that monetary stimulus will go away,” they added.

Normally, if the bond market goes down, banks wait a little while to see if that’s where they’ll stay and then they move down accordingly. But in the unstable environment of our time, lenders are worried about risk premiums. Rates are apparently “all over the map”.

“They are changing daily. Sometimes they are changing hourly,” another expert said. “People who are shopping are going to be so confused.”

The expert advises most of her clients to choose variable loans under the current circumstances, saying, “It offers a bit of stability in a chaotic world.

“Inflation is not happening any time soon and that is what will make the Bank of Canada increase. So I think we’re down here for the long haul. If the fixed rates go down, you would have the opportunity to lock in if you wanted to,” they continued.

There is a big backlog of deferral applications; with lenders seeing a 300- or 400-% increase — which may also be contributing to the spread in rates. One lender was apparently trying to process 24,000 deferral requests.

Some consumers are spending more than half a day on hold waiting to talk to a bank. Many are choosing to refinance their loans to survive the crisis.

People are pulling money out of their houses as an emergency fund, to defer work to look after children, or they are worried about employment and want to apply for refinancing while they can show income from their job.

Employment Insurance does not qualify as income on a loan application. For consumers with a big commercial rent, you have to pay and you’re closed, it’s a bad situation for a lot of people.

In the housing crisis, there were service industry jobs for those who lost their source of income. This time, there’s no work because the hospitality industry has shut down.

“As soon as the first government makes an announcement that individuals can convene again and it’s safe to go out for a meal, there’s probably going to be quite a bit of pent-up demand (for restaurants). People are already going stir-crazy in their home offices so they’ll be happy to go out,” they added. “But it will take a while before all those hospitality businesses are up to capacity again. “So it’s going to be a slow climb out of the economic turmoil we’re in.”