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Mortgage Minute 3: Canadian Mortgage Rates and COVID-19

Alberta and pretty much the whole world is in a state of a public health emergency. Many jurisdictions are under forced quarantine, or shelter in place orders.

In addition to the emotional, and economic mayhem caused by COVID-19, and the generally cautious response by governments around the world, we also have somewhat of a price war happening in oil. Russia and Saudi Arabia have increased productions at the same time that the demand for most forms of refined oil has ground to a halt. Oil companies and refineries are cutting production to minimize losses.

A barrel of Alberta oil is now trading for less than the cost of a barrel of monkeys.

This morning Prime Minister Justin Trudeau announced a measure that will help small businesses supplement employee wages to 75%. Details are thin at this point.

The Bank of Canada made history this morning. March 27, 2020. It announced the third rate drop in less than a month. Normally interest rate announcements by the Bank of Canada follow a set schedule of once every 6 weeks, and most of the time, they announce that there is no change to the rate. Three drops in one month is unprecedented. Each of the three rate drops was a full half percent, or 50 basis points, where normally rate changes happen in 25 basis point, or quarter percent, intervals.

The bank of Canada rate is now 0.25%. This is the rate that the banks pay each other overnight as they settle accounts between each other. The retail Prime rate floats quite a bit higher than that. With the first two half-point drops, the retail Prime rate dropped from 3.95%, where it sat for over a year, down to 2.95%. It remains to be seen if the banks pass on the latest half percent, or even a portion of it, on to consumers. We will likely find out by April 1st.

These bank of Canada rate announcements usually make people think that rates are dropping!

For those in Lines of Credit, the prime rate has dropped. However, the banks are able to change how much above prime they price these credit lines since there is no fixed term. If you are in a Home Equity Line of Credit, I wouldn’t be surprised to see your rate increase from Prime + half a percent, to Prime + a full percent.

If you have a variable rate mortgage, your rate is dropping, and in most cases, your payment.

However, if you are thinking about getting into a new variable interest rate today, the decision isn’t immediately obvious. With the full percent rate drop in prime earlier in March, we saw lenders go from offering rates on new mortgages at a full percentage rate below Prime, to equal to prime. So Before when Prime was 3.95%, variable-rate mortgages were available between 2.75% and 3%. Now that Prime has dropped to 2.95%, variable-rate mortgages are still available for about 2.85% to 3.1%. With this most recent drop, I would expect the rates to only drop slightly as the discounts from prime fully disappear and become bonuses above prime instead.

Now – FIXED RATE mortgages. Last time I did a video blog on March 17, a couple of days after the second rate drop on Friday the 13th, I mentioned that fixed rates were low. This was after the March 6th big drop in the bond market which you can see on the chart of bond pricing over the past year. Bond pricing is a key driver to fixed-rate mortgages. Bonds are debts to government, banks, or other businesses and fund most fixed-rate mortgages.

However, there is an inverse relationship between the stock market and the bond market. As companies lose value, the risk of lending them money increases, thus raising the interest rate. And with COVID-19, the risk of layoff or property devaluation has caused mortgage bonds to become riskier too, which has lead to a large increase in fixed mortgage rates. Now, back to that chart, at the far right, you see that today, March 27, 2020, that bond rates dropped again, so we will have to wait and see if that sticks, and what it means to interest rates over the coming weeks.

There is a lot of uncertainty is the markets. We are really only two weeks into extreme social distancing and isolations. If you have questions, concerns, or are looking for any advice, let me know!

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March 28, 2020


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