As we are going into some of the most trying times this country has faced in years, many of our clients are wondering about what direction the mortgage market in Canada will take. Over the last number of days, I have received many emails from our clients requesting information on rates as well as market updates.
Real estate, in general, is a very stable investment. This is due in part to the length of time it takes someone to liquidate a property. However, over the last number of days, we have seen layoffs occur and a major shift occurs in the mortgage interest rates. This can and will have an impact on the housing market.
Although we have not seen a major decline in the number of transactions occurring in the market, it is expected that the pandemic will have a cooling effect on Real estate markets across the country. This is due in part to the self-isolation measures that many Canadians are taking part in. I do believe however that this will only be temporary and in the next couple of weeks to a month, we will see things going back to normal as the weather warms up and the crisis is brought under control.
It is strongly recommended that during this period of time if you will be visiting homes. You must take preventative measures for your safety and the safety of the homeowners that reside in the home.
A few recommendations that we have for our buyers are as follows …
- Make sure to refrain from touching any furniture in the home you are visiting
- You should be sanitizing your hands before and after any home visit.
- If you are feeling unwell DO NOT VISIT ANY HOMES.
- As well if you are selling a home and you are not well please DO NOT ACCEPT ANY VISITS
- Once visits are over in a home the real estate broker and client should take measures to sterilize surfaces
On the Mortgage front, we have seen some major changes come up. Some rates have gone down while others have gone up. The question is what is going on. Let’s dive into it and address each item individually.
Mortgage interest rates and the Bank of Canada rate reductions.
In the last couple of weeks, we have seen the Bank of Canada cut rates twice in an effort to stimulate and take protective measures for the economy. The Central Banks overnight rate (Policy Interest rate) was cut on March 4th, 2020 by .50% , and then on March 16th, 2020, it was cut again in an Emergency meeting by another .50% . The combination of both these cuts has lowered the overnight rate down to .75%.
What is the overnight rate exactly and how does it impact me?
Simply put, the Overnight Rate is the rate at which major financial institutions borrow and lend funds amongst themselves. The BoC sets the target for this rate and it is also referred to as the Bank’s policy interest rate.
The way it impacts the average consumer is that it influences other interest rates such as the bank’s prime rate. The prime rate is used when one talks about variable-rate mortgages, home lines of credit and personal lines of credit.
When someone takes out a variable rate mortgage it comes with a guarantee of what the premium or the discount that you receive off the prime rate is.
Here is an example to illustrate.
A current 5 yr Variable comes with a -1% discount off the prime rate. If the Prime rate is 3.45% at Bank ABC, this would give you a mortgage rate of 2.45%. The guarantee that you have for the next five years is the discount off the prime. In our example using a 1% discount, if the prime rate drops to 2.95%, then your rate drops accordingly and the new rate will be 1.95%. If the prime rate goes up, then your rate goes up. It is expected that as the prime rate drops and the threat of recession comes up we will see the banks reduce the discount that they have been offering. We have already seen a few institutions raise the discount from -1% to -.25%
How is the Bank’s prime rate calculated?
For the majority of institutions today they are charging a premium on the Overnight rate of 2.2%. A couple of banks are charging a slightly higher premium on the Overnight rate but nothing crazy. As we previously said if the Overnight Rate is at .75% and the banks are charging a 2.2% premium on that rate, then the prime rate ends up at 2.95% We have seen over the last number of days banks have cut the prime rate down to this level.
How does the Overnight rate impact the economy?
What is the point of the Overnight rate or Policy Rate
The Overnight rate is one of the main tools that the BoC uses to influence inflation. The goal of the BoC is to keep inflation low. This creates an environment that is stable and predictable. It is also used to determine lending rates by the banks. It will also influence what the banks will pay on GICs and other savings as well.
Will the reduction of the overnight rate impact my 5yr fixed rate.
The Overnight rate does not have a direct impact on the 5yr fixed rate or fixed rates in general. These rates are based on the bond market and as such do not get directly influenced by rate cuts from the BoC. However, the changes in the Overnight rate does over time have an impact on the bond market and as such we do see a reduction on fixed rates due to that fact.
What is our recommendation to our clients and to our community?
In this ever-evolving market, uncertainty can lead us to bury our heads into the sand and hide. This is exactly what you should NOT be doing. If you feel that you need help with mortgage payments or that your job is at risk, now is the time to reach out to your broker and ask for guidance. In many cases, you will be allowed by the lending institution to get a payment holiday of 1 or two months depending on whether or not you have a CMHC backed mortgage. You should not go at this alone. Our job as mortgage professionals is to help you navigate through this time of crisis.
Is this a good opportunity for me to renegotiate my mortgage?
YES! Daily, interest rates have been dropping. If you have been thinking about refinancing your mortgage for debt repayment, or for investment purposes, now is the time to act. Rates are low and it is definitely something you can take advantage of. Our brokers and staff are here to help you through this all.
North East now and always has been committed to consumer education and consumer empowerment. We welcome anyone who wishes to call our offices for help and support. Regardless of if you are an existing client of North East, we welcome you to communicate with us for information and guidance. Our office will remain open during this crisis. We are taking measures to protect the safety of our staff, brokers, and clients. This includes daily sterilization of the office environment and we have implemented a work from home program for any non-essential staff and brokers.
Be safe everyone.
President & AEO
And our email address is firstname.lastname@example.org