A second surprise rate-cut this month from Canada’s central bank, has mortgage experts reluctant to predict what is in store for consumers, who are reeling from lost income in the COVID-19 pandemic.
The Bank of Canada’s decision to lower its key rate to 0.25 per cent was primarily aimed at easing the economic shocks of virus containment and plunging oil prices — but its effect on mortgage rates is downright confusing.
Paul Taylor, CEO of Mortgage Professionals of Canada, says there could be a slight reduction in mortgage rates but it may not occur immediately because the banks’ margins on mortgages are already thin and investors are demanding such rates of return, there isn’t enough money to go around.
“So consumers may not see an immediate pass-through of the rate reduction that occurred today,” said Taylor.
“If the market remains turbulent, they may not see any of it.”
Since last week, some mortgage and commercial lending rates have actually risen.
It usually takes about three business days for the banks and major lenders to announce whether they will move their rates in response to the Bank of Canada’s, said James Laird, founder of mortgage site Ratehub and president of CanWise Financial.
Around March 17, the best fixed rates being offered by most lenders were between 2 and 2.5 per cent, Laird said. Just over a week later, those had gone up by an average of half a per cent.
It is impossible to predict what will happen in the coming days, he said.
What the bank rate means to different borrowers varies depending on whether a consumer holds a loan already or is applying for a new one.
“Everyone’s complete financial picture has probably changed a lot in the last two weeks. The mortgage is only one part of the whole household finance picture,” he said.
Those with variable rate mortgages and loans such as Home Equity Lines of Credit, “are doing great.” They have already seen a full one-per-cent drop this month and it’s likely they will benefit by the latest 50-point fall, he said.
“Prime is likely going to be 2.45 per cent if (lenders) pass along the entire 50 basis points. A lot of Canadians have something like prime, minus one per cent. Many Canadians’ variable rate mortgage will certainly be less than two per cent and a lot of them will be around 1.5 per cent — really cheap money,” said Laird.
For those who are applying for new loans, variable rate discounts have been shrinking and fixed rates have been rising.
“Even though logic suggests they should drop, the history of the last three weeks suggests that might not happen. It’s possible they stay the same or they go up,” said Laird.
Fixed rates are more difficult to analyze. Typically the central bank cut would result in reduced fixed-rate loans. But since about the middle of last week lenders have been inserting an unusual “fixed-rate premium” into their mortgage pricing, he said.
Those who believe Canada is heading for a long recession may expect the variable rates to stay low. Consumers who expect the country to rebound later this year or early next year could lock in a fixed rate, because, when the economy improves, variable rates will rise.
“The bank has extended an extraordinary monetary stimulus to deal with this extraordinary time. When the extraordinary time is over, you can expect that monetary stimulus will go away,” said Laird.