While COVID has been the biggest ongoing story of the year and the global pandemic has impacted everyone, there are many related stories too!
Interest rates of all sorts have been all over the map this year. I am sure that most of you will remember that in March, the Bank of Canada took the unprecedented step of three quick half per cent drops to the overnight rate, which serves as the basis to the retail prime rate. This saw those in variable-rate mortgages find their rates drop to below 2% for the first time since the subprime mortgage collapse and global recession over a decade ago!
But it wasn’t all rosy for mortgage rates. In February you could get a mortgage a full percent below prime. New variable rates no longer got that discount below prime which meant that the rates were not nearly as attractive as those held by current variable rate mortgage holders.
Further, as the risk of mortgage default increased due to mass layoffs in March and April we actually saw new fixed rates increase for a few months. They went from about 2.5% to about 3%.
The federal government responded with massive stimulus to the market. This provided low-cost liquidity to the market. And as financial markets and investors grew more comfortable with the new normal, and some people returned to work, we have now seen interest rates drop to levels never seen before.
Before this pandemic, we had never seen fixed mortgage rates in Canada break the 2% barrier! And that happened a few months ago. Currently, most mortgages in the market are found between 1.5% and 1.99%
On December 9th, the Bank of Canada made its 10th interest rate announcement of 2020. Normally there are only 8 or 9 such announcements in any year!
After dropping its overnight rate three times in March, the Bank has held the line on rates since then and but continues its massive quantitative easing program to support market liquidity. Quantitative easing is a fancy term for the Bank of Canada buying financial assets like mortgage bonds, which keeps money available, at low rates, when other investors are less inclined to invest. This keeps money in the market. Currently, the bank is injecting over $4 billion a week into the market.
As a result of the Bank’s moves, borrowing costs for new mortgages will be very low going into the new year, and likely well into the year as well!
According to the Bank of Canada, economic momentum heading into the end of the year is higher than had been expected only in October. However, with record-high cases of COVID-19 in many parts of Canada are forcing re-imposition of restrictions, which the Bank expects will dampen growth in the first quarter of 2021 and contribute to a choppy trajectory until a vaccine is widely available”
The Bank’s Governing Council acknowledged that Canada’s economic recovery continues to require “extraordinary monetary policy support.” So we can expect to see the interest rate remain the same or nearly the same for quite some time. In October, the Bank suggested that the normal inflation target of 2% may not be achieved until 2023 – and it made no further clarification.
What does this mean to you? If means that if you are in the market for a mortgage in the next 6-12 months, you can expect a very low rate. I expect we will see both fixed and variable mortgage rates stay under 2% at least until the middle of 2021. If you are considering buying a home, with today’s rates, we are seeing that most of your monthly payment is going toward paying down the principal balance of the mortgage. This has never happened before. So, if you are in a solid financial position, there really hasn’t been a better time to get into the market that I have ever seen!
If you are wondering what this can mean for you – either as a mortgage renewal, a mortgage refinance, or to purchase a home – please reach out to me. I am happy to help you figure out your best solution and design a roadmap to success. As always, my commitment to you remains the same. To give you the best advice I can, and to help you get the best mortgage that will help you to achieve your personal and financial goals.