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Our Big 6 Banks chose not to announce their prime rates following Friday’s surprise Bank of Canada rate dro
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Instead, people in a floating rate mortgage or HELOC must wait to learn how the BoC’s move will impact their budgets. Banks could take a few days or more than a week.
This isn’t unheard of. Back in 2015, when the Bank of Canada surprised the market with monetary easing, it took banks six days to announce a prime rate reduction, and borrowers only got 15 of the BoC’s 25 bps rate cut.
When banks finally get around to setting prime, people will be hoping for a full 50-basis-point reduction to match the Bank of Canada. That would take prime rate down to 2.95%, where it hasn’t been since summer 2017. But that’s far from a given.
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The prime rate saga was just one thunderbolt in Canada’s mortgage market on Friday. Here’s the other big news…
Prime – 1.00% Discounts Become an Endangered Species
Juicy variable-rate discounts are disappearing faster than toilet paper at Costco. We saw a half-dozen lenders slash their discounts from prime rate on Friday—by anywhere from 20 to 75 basis points.
Finance Minister Bill Morneau said Big Bank CEOs had “committed to me” that they won’t overreact to the crisis by squeezing borrowers. Meanwhile, one major bank jacked up its variable rates by over half a point Friday night. That completely wiped out any benefit from the BoC cut, for its new mortgage customers.
As we reported this week, the economics of fat floating-rate discounts no longer make sense for most lenders in an increasingly risky low-rate market. If you want a variable mortgage rate, shop immediately. As we speak, you can still find deals at prime – 1.10% or better. But probably not for long.
The New Stress Test Gets Pushed Back
The easier mortgage stress test that was supposed to start on April 6 will now be delayed indefinitely, says our banking regulator. “OSFI is suspending all of its consultations and policy development on new or revised guidance until conditions stabilize,” it said.
That means the current minimum qualifying rate—which equals the typical Big 6 bank’s 5-year posted rate—will temporarily remain in force.
This news applies to all default-insured and uninsured mortgages at federally regulated lenders.
The Stress Test Gets Easier Anyway
Based on current big bank mortgage rates, the minimum qualifying rate (a.k.a., “benchmark rate”) for the mortgage stress test will fall from 5.19% to 5.04% this coming week.
BMO’s cut to its posted 5-year rate on Friday was largely responsible. Its drop lowered the mode average of the Big 6 banks’ posted 5-year fixed rates, which is the basis for the stress test.
The reduction provides borrowers on the edge of qualifying with roughly 1.3% more buying power. For a household making $100,000, with a 20% down payment and 30-year amortization, the buying power boost is roughly $8,500.
And it’s possible the benchmark rate could fall to 4.99% if one more bank matches BMO and RBC at that rate.
Some Fixed Rates are Climbing
While not widespread, yet, a small but notable percentage of lenders are increasing their fixed mortgage rates Saturday. We’re watching closely to see how much of a trend this is. Like we wrote last week, fixed rates surged in 2008 despite plummeting bond yields. It could happen again if investors pull back on funding big banks.
Any borrower needing a mortgage in the next four months should secure a rate soon, just to be safe.
Canada’s Key Rate Headed Toward Zero
“We look for the overnight rate to reach 0.25% no later than April 15th,” said TD Securities on Friday, as reported by Bloomberg.
As of Friday evening, prices in the overnight index swap (OIS) market (as tracked by Bloomberg) suggested Canada’s overnight rate would sink to 1/4% by year-end. The OIS implied rate even dipped below zero at one point on Friday—but OIS trading is volatile, so you can’t read too much into that.
Driving all of this is fear of a recession, which is now a high probability. And it’s not only coronavirus panic we have to worry about. The oil price crash is crushing, too. For every 10% drop in oil prices, Canada sees a 1/8th percentage-point drop in economic growth, says Scotiabank.
Negative Rates Not a Happy Place
“I don’t think I’m alone among central bankers,” said BoC head, Stephen Poloz. “We don’t like the idea [of negative interest rates] that much. It’s in the tool kit … [but] it’s not a happy place for the banking system.”
“I don’t think I’m alone among central bankers,” said BoC head, Stephen Poloz. “We don’t like the idea [of “The idea of negative interest rates is something we can put up on the shelf and know that it’s there, but it’s very unlikely to be needed,” he added. Of course, the coronavirus was also unlikely.
Either way, borrowers won’t see Canadian lenders offering sub-zero mortgage rates—like this Danish bank—anytime soon.
Another Boost for Mortgage Liquidity
Access to mortgage capital has grown more expensive relative to “risk-free” government bond yields. That’s one reason why North American central bankers pledged support this week to keep credit flowing. They were wise to get ahead of a lending freeze-up, but we’re not out of the woods yet.
OSFI also did its part, freeing up more bank capital for lending by reducing its Domestic Stability Buffer. The regulator said it “expects that banks will use the additional lending capacity to support Canadian businesses and households, and should not use this measure to increase distributions to shareholders or employees or to undertake share buybacks.”
Skip-a-Payment Features Could Come In Handy
34 Comments
For all the support our government gave banks, they should have made banks sign a contract stating they will reduce prime rate by 1/2%
Dear Spy, do you wish to comment which major bank jacked up its variable rates by over half a point Friday night? Thank You.
Hi Mario, Scotiabank.
The 6 banks better lower the prime rate by 0.5%. The public should be outraged and screaming if that does not happen.. these banks make lots of money on fee’s
With a mortgage renewal coming up this summer, it feels utterly surreal to be worried that I need to be concerned about locking in early because rates might climb in a period of historic BOC rate cuts.
The banks should be taken to task for this behaviour.
Not to be picky, but the people in the prime rate photo are not practicing social distancing.
They have been warned.
Will mortgage rates go further down in upcoming weeks?
Hi Sheen,
If you’re shopping for a brand new mortgage, the safest bet is to get a rate hold ASAP. If rates do drop (not a prediction) then you can reset your rate lower.
If you’re in a variable wondering whether to lock in, that’s not something we can advise on here. Too many borrower factors to consider.
Just know that credit risk and lender costs are climbing. That’s never great for mortgage rates in the short-term, and potentially medium term.
It is the central banks who are totally and fully responsible, with idiotic government politicians , that have created this mess. This is a controlled and planned takedown of the middle class since 1913. Get rid of central banks, institute the gold standard, ….people need to act and reject this idiocy.
Hi Spy.
Would you say the rate cut may affect house prices. There may be demand for houses which may drive prices up. I have been ? shopping for the last 1 month. Is it time to buy now. Or would you advice stay hold for more month to come
Hi Danny, There are too many unknowns to answer that. We know however that recessions are usually not bullish for home values, and recession risk is surging. And anecdotally from GTA/GVA realtors we’re hearing buyers are becoming more cautious as sellers are becoming more anxious (FWIW), but real estate markets across the country can be very different.
Scotiabank also raised their fixed rates on Friday, did they not?
Bob, Yesir.
Hello, Spy.
I was (not sure how much) lucky to move my mortgage to a different bank on Feb 12 and change from fixed to variable. I am (admittedly egoistically) happily watching the rate cuts happening now. But I understand it is bad for a lot of ppl in this economy. This and the gas prices dropping is a silver lining in an otherwise terrible economic situation. My question is, how fast do you think the central bank would go for hiking the prime rate back up once the bottom passes. Thank you.
Soy – i keep looking for an answer to this question – i have an open mortgage and a HELOC. No the mortgage is not our first mortgage, it is our third. Can my wife and i combine HELOC and mortgage to have one payment/loan?
It used to be called “Moral Suasion”. Maybe the govt should use more of it. I remember Flaherty threatened the banks (with what, I don’t remember) to lower their rates when the BoC did to address the financial crisis. The banks listened.
Hello Spy we really need a good advice weither to keep shopping or not new a mortgage to buy an house. What is the risk with that virus outhere. Like for new constructions, houses may not be ready on time by july 1st ect .. dont know what to do.
The rumor on the street is this based on sources:
1) Scotia decided to decrease the spread discount by 0.5% on variable rates – i.e. consumers get no savings at all!
2) Scotia as well is looking to another rate increase next week
I think we need to start a social media storm if the banks screw consumers. We need to use public pressure to force the big banks hand
They may be screwing mortgage rates but the will before long pay no interest on GICs. Retired people holding the Famous RRSP the government pushes earning 0% will bankrupt many seniors and said government won’t be announcing help for us!?
Well if my bank does not reduce the rate by .5 I am withdrawing all my money leaving behind minimum. These thiefs are not going to have my excess money in their vaults to incest while we, play by their rule book.
Hi,
Is it a good idea to now to move my variable to a fixed rate? Or should I just opt in to pay just the minimum and save on my monthly mortgage while keeping my variable? This could lead to taking even more advantage of lower rates if any in the upcoming weeks/months
Hi Ali, We can’t give one-on-one advice here but I typically wouldn’t advise well qualified financially stable variable-rate holders to lock in at this point.
@John,
Consumers with existing variable-rate mortgages (or, those who have locked in rates for up-coming new mortgages), will benefit if banks pass on the BoC rate reduction. They are only reducing the spreads for new mortgages. The banks have to make money, too. It’s just smart business.
Hi Spy,
I’m on a variable rate and renewing in June 1st, do you think this is the right time to do so? Or wait for another cut in April?
Thanks in advance for the advise.
Dina DG
Whether a borrower requires a fixed or variable rate, they should secure a rate hold immediately if closing in the next four months.
It’s still possible to find excellent variable rates today and lock in those discounts from prime rate.
If the preference is for a fixed mortgage, great rates can be locked in now and dropped later if mortgage pricing falls.
Are the people complaining about mortgage rates that “should” go down, also complaining about their RRSPs? Banks need to remain profitable through this for your investments in them to go back up and grow past.
Excellent article thank you – a public service.
Appreciate it Ross.
Rob
Have you heard of our All in One product for a mortgage, it is daily interest which means lots of interest savings, and it allows the client to be in control of their debt at all times.
For everyone thinking of pressuring the banks instead contact your federal MP and inform them to get working for you on this matter. Remind them of your excellent memory come election time.
Any word when MCAP will announce if they will pass along the second rate cut like the big 6?
Hi Biki, Not sure when but know with 99% certainty that MCAP will drop to 2.95% on prime.
The Spy – I hope so. I know I can use my variable rate mortgage payment dropping another $30-40 biweekly right now, while at the same time putting a little more on principle.
If MCAP/RMG Mortgages doesn’t I know I’ll be taking it to Twitter/Facebook/etc and calling them out for profiteering off the BOC’s cut designed to help Canadians with the incredible fallout from COVID-19, not enrich these companies.
Any word on Street Capital (now RFA) reducing their prime rate..seems like its been days and they are not responding on any rate cut…