Coronavirus is officially a global pandemic. Because of that it has disrupted the daily lives of people worldwide. Canada is no exception. Besides being a health crisis, it also has the potential to be a financial crisis. It has affected the stock market, employment and mortgage rates.
Lower Government of Canada bond yields normally lead to lower mortgage rates and that was what was happening at the beginning, but we’re actually seeing mortgage rates jump.
Let’s take a closer look at how Coronavirus is affecting mortgage rates.
What’s Going on with Fixed Mortgage Rates?
Lenders determine fixed mortgage rates based on Government of Canada bond yields. Fixed mortgages rates have a direct relationship with Government of Canada bond yields. When Government of Canada bond yields go up, so do fixed mortgage rates and vice-versa.
Lenders aren’t just in the business of offering mortgages to be nice. They’re also doing it to earn a profit. As such, lenders take Government of Canada bond yields and add a spread to come up with fixed mortgage rates. There are other factors at play that determine mortgage rates like competition, but Government of Canada bond yields are the primary driver.
Ever since the beginning of the year when Coronavirus started becoming a problem, Government of Canada bond yields were heading downward. As a result, fixed mortgage rates dropped dramatically. However, this trend changed in early March.
When Coronavirus started to become a real problem in Canada and disrupt our economy, that’s when fixed mortgage rates started to go up. Despite Government of Canada bond yield still being low, mortgage lenders started to become concerned with the credit of Canadians. Lenders also started to worry about the illiquidity in the markets. It’s no longer as cheap or as easy for banks to access capital. As a result, fixed mortgage rates have been heading up.
The Bank of Canada is trying to solve the problem, but only time will tell if fixed mortgage rates start to head downward again.
What’s Going on with Variable Mortgage Rates?
Lenders price variable rate mortgages based on the Bank of Canada’s overnight lending rate. That’s the rate that banks lend one-day funds to one another. Based on this, each individual lender sets its own prime rate (although prime rate is usually the same across the board).
A mortgage lender then typically offers a discount off prime rate for its variable rate mortgages. For example, if prime rate were 2.95 percent and the discount offered on a variable rate mortgage was minus 0.90 percent, your mortgage rate would be only 2.05 percent (2.95 percent minus 0.90 percent).
The Bank of Canada’s original plan was to hike interest rate. Then the whole Coronavirus situation happened. The Bank of Canada has since cut interest rates three times in March alone.
If you’re a homeowner with a variable rate mortgage with a decent discount off prime, you’re benefiting from an ultra-low mortgage rate right now. If you’re a new homebuyer, you might think twice about signing up for the variable rate. With lenders no longer offering discounts off prime rate, variable rate isn’t as enticing as it once was.
Brought to you bySean Cooper