Benchmark interest rates are plummeting globally in response to COVID-19 crisis. Rates are being dropped in hopes to stimulate economies by making it easier to borrow and spend. But interestingly, in Canada mortgage rates aren’t really plummeting as much as some borrowers expected. Moreover, in some parts of Canada mortgage rates actually increased! Let’s take a look at this together.
Why aren’t mortgage rates dropping?
Mortgage rates usually fluctuate in response to a range of factors. One of them is the costs suffered by the lender itself. Banks don’t have an unlimited amount of cash lying around, ready for the borrower to take, contrary to popular opinion. In fact, banks oftentimes borrow money from elsewhere and then lend it to clients, making profit off of the interest rate.
How does benchmark rate affect mortgage rates?
The Bank of Canada benchmark rate affects all banks’ own prime lending rates. In the month of March our Central bank made big cuts in efforts to stimulate the economy and make it easier for people to borrow and spend. They cut the rate by 150 basis points or 1.5 percentage points.
Initially this change resulted in big drops in the variable mortgage rates – occasionally you could find a rate of prime minus one! However, several weeks later things changed.
Why interest rate dropped but mortgage rates increased
Although during the first weeks of the COVID crisis banks happily cut their rates, with time they reversed their strategy. In the current stay-home situation and high risk of future unemployment banks became cautious and started building in a risk premium to their pricing in order to protect themselves from defaults.
Banks feel just as uncertain about the future of the market as any of us. Now many banks are reversing the low rates and are actually increasing them – demanding a higher than usual risk premium.
Experts believe that despite the bond market crisis, banks are still making high profit margins. Five-year mortgages proposed by big banks are highly profitable to the bank but may create an issue for borrowers. If rates drop in the future, home buyers that signed up for fixed five-year rates with “wrong” lender will have to pay big penalties of tens of thousands of dollars to break them. Once the market situation becomes clearer, banks will start to lower rates again. When exactly this will happen is up for discussion.
If you are looking to refinance or purchase a home over the next few month,contact us today at 877-296-2696 or email us by e-mail info@homemortgageadvice.ca.
We have access to lenders that did not raise their rates as much as others and our system will automatically lower your approved rate when banks will decrease theirs and it only takes 30 minutes of your time.