The Federal Reserve made an unscheduled rate announcement yesterday and cut their overnight rate by 50 basis points. The Bank of Canada wasn’t largely expected to cut its rate today at its scheduled announcement, but it followed suit and also cut its overnight rate by 50 basis points. This is the first rate cut we’ve seen since 2015.
Anyone who did expect to see the Bank of Canada make a change was anticipating only a 25 basis point cut. The Bank hasn’t cut more than .25% at a time since 2009. The speculation is that if the Bank didn’t mimic the Federal Reserve’s move it would have put upward pressure on the Canadian dollar and added to problems exporters are already experiencing.
Further cuts are expected this year, the first of which being at the next rate announcement in April.
So why the sudden drop? COVID-19. If you’ve been living under a rock or doing a social media cleanse in the last couple of months, you may not have heard, but COVID-19 is today’s SARS or H1N1. The disease, which started overseas, has claimed more than 2000 reported deaths worldwide and, according to the Bank of Canada’s announcement, has seriously impacted Canadian and global economies.
“Before the outbreak, the global economy was showing signs of stabilizing, as the Bank had projected… However, COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply and supply chains have been disrupted. This has pulled down commodity prices and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. ” [Bank of Canada press release]
Thankfully the health of Canadians has been largely unaffected, with less than 35 confirmed cases of COVID-19, but it is becoming increasingly evident that the virus is affecting our economy. People don’t want to travel, businesses are more hesitant to do international trade, some people are even putting their lives on hold. A good friend of mine has been planning for years to spend his 40th birthday this year with his wife in Indonesia. But because of the virus, they’ve cancelled their trip. Yesterday I heard on the radio that one local lady who runs a business out of her home and has packages delivered to her from China is keeping the items sealed in their boxes for five or six days, quarantined in her garage, just in case the packages have been contaminated.
The topic of of coronavirus is all over social media, the news, the radio, and even seemingly unrelated sources, like right here on my blog! So what does this virus and the Bank of Canada rate cut have to do with a mortgage?
The Bank’s overnight rate typically affects the Prime rate offered by consumer banks, which affects the mortgage interest rates available to you. Typically banks will match whatever drop the Bank of Canada announces, but that wasn’t the case in 2009 at the last rate drop. How much of this decrease will get passed on to the consumer is yet to be seen. However, changes may come as early as this afternoon.
Brad Walker from Redline Real Estate Group said, “With our market the way it is around here, [the rate cut] definitely helps more people feel comfortable in what they can afford with a lower rate.” If you’re in the market to buy a house, this is good news for you! In addition to the relaxed stress test for insured mortgages coming in April, we’re also expecting to see the stress test ease up on conventional mortgages. There’s also news that the stress test will be done away with on renewals with new lenders.
Brad went on to say, “[This] should put our market in a better position and more buyers will likely come out of the woodworks and look at buying again now that they can afford more. Low prices, super low interest rates, and a reduced stress test all point to good news for buyers looking to take advantage. And when more buyers come out, that levels out supply and demand which is when the market starts to turn around.”
So! Wash your hands, cover your mouth when you cough, and stay home if you’re not feeling well. If you’re in good health, come see me about setting up the mortgage you’ve been waiting for. If you’re not in good health, call me instead.