The Bank of Canada announced an unplanned change to their overnight rate to take effect Monday March 16, a cut of an additional 50 basis points just 9 days after the Bank had already cut the overnight rate by 50 basis points. In under two weeks the overnight rate will have dropped from 1.75% to just 0.75%.
The Bank of Canada stated that, “This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices.”
Variable Mortgage Rates
This news impacts homeowners with variable rate mortgages. Variable rates are determined by the lender’s PRIME rate, which is influenced by the Bank of Canada’s overnight rate. When the Bank cut the overnight rate by 0.50% on the 4th most (if not all) mortgage lenders followed suit and cut their PRIME rates in lockstep. When the Bank announced on the 13th that they would again cut the rate by 0.50% (effective March 16) lenders immediately put the additional cut into place.
Mortgage rates normally fall when their is economic uncertainty and inflation is expected to be low. The coronavirus contributes to both of these. The Bank went on to say, “It is clear that the spread of the coronavirus is having serious consequences for Canadian families, and for Canada’s economy. In addition, lower prices for oil, even since our last scheduled rate decision on March 4, will weigh heavily on the economy, particularly in energy intensive regions.”
The Bank will continue to keep both eyes on the situation and make changes as necessary. The next scheduled rate announcement will be on April 15.
It is expected by some that interest rates will come up again after the coronavirus has been contained and threat of further spread decreases. When this happens, consumer spending will return to normal, the economy pick back up, and inflation will come back to target, which will justify increased interest rates.
Fixed Mortgage Rates
Despite seeing massive drops in variable rates, fixed rates are on the rise. Why? This is because fixed mortgage rates are not guided by the Bank of Canada overnight rate. They follow the pattern of Canadian Bond Yields, plus a spread, where yields are influenced by things like inflation, export, and unemployment.
Gordon Ross, Managing Partner at Axiom Mortgage Solutions, sent an email to associates today explaining the rising rates.
“I have spoken with a few of our lending partner’s credit managers and the answer, while perhaps counter-intuitive, is fairly simple. They site the fact that the 5 year Canada bond is on the rise and that the stock market is up 10%. This, coupled with the way that they hedge funds, could lead them to losing large sums of money with further rate reductions.”
For the Consumer
When it comes to choosing between a fixed or variable rate mortgage there are pros and cons on both sides to consider. Fixed rates give you the reassurance that your mortgage payment will remain the same whether or not rates change. The comfort of predictability is often a preference homeowners choose. However, locking in with a fixed rate can prevent you from taking advantage of a significant drop in rates.
Variable rates have the benefit of giving the homeowner lower payments if the interest rate drops. However, this same flexibility also leaves the borrower open to higher payments should the rates increase. This type of risk must be weighed against your financial stability as well as the likelihood that you will see rate increases during the length of your mortgage term.
To find out which option is best for you, contact me anytime!