Mortgages during the pandemic
Interest rates and mortgages are a subject that a lot of people are talking about recently because of the unstable economic situation due to Covid-19.
In January of this year, just before the pandemic of Covid-19 in Canada, the government announced a five years fixed rate of approximately 2,89% to 3,09%. As you probably know already, the fixed mortgages rates are based on the value of bond yields and these bonds are trading at around 1,5%.
More Context on Mortgage Rates
For more context, the Bank of Canada‘s key lending rate was at 1,75% and for the prime lending rate, it was at 3,95%. As you might already be aware, variable mortgage and lines of credits are affected and based on the prime rate (3,95% at that time). At that specific time, mortgage lenders were fully operational and offering prime rates that were discounted to sign new deals, those rates were as high as 1% in certain cases.
By March 2020, the 5-year bond yields decreased as low as 35 basis points and the fixed-rate mortgage rates also decreased around 2.39%. It then increased between 2.84 and 2.99%%. Those values are now starting to trend toward a decrease once again.
Common Misconception for Mortgage
A common misconception for a mortgage is that the five-year fixed mortgages rates and the five-years bond yields are connected and that cuts to the Bank of Canada overnight rate will result in lower rates. The same way as variable mortgages is thought to be connected to the Bank of Canada overnight rate. In the past, it has mostly been the case but it is not impossible that these two stop following each other.
With this recent pandemic, the “traditional” rules for mortgages do not necessarily apply. The economy is going through so much right now that it’s impossible to predict what will happen next.
Even with some low bond yields and the cuts that are applied to the prime rates, lenders are forced to consider other factors like the increase of unemployment for example. It is pretty obvious that to have a good economy, you need to have people working. Without work, the purchasing habits slow down, the budget gets a lot tighter, manufacturers reduce their inventories and all that can lead to more lay-offs which will cause bankruptcies to rise. Job loss is one of the leading causes of mortgage default.
Because of this unstable situation that is Covid-19, future mortgages might be higher because lenders are trying to build risk premium into their rates. That could cause mortgage defaults to be higher. The housing market is one of the vital components that can help to the success of the Canadian economy.
There is hope and eventually, the economy will start to become more stable and jobs are going to return slowly. Low-interest rates on your mortgage will most likely be there for a while to help restart the country’s economy. If you have any questions or if you are looking for a mortgage, you can ask Ryan Mitchell and he will take the time to help you.