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Emergency Bank of Canada rate cut will add fuel to housing sales

Some variable-rate mortgage holders will be paying rates as low as 1.95 per cent; mortgage stress test nearly nullified
Mortgage broker Peter Kinch: “Those borrowers who have stuck with variable rate mortgages now look like geniuses.” | Image submitted

A dramatic 0.50 per cent reduction in the Bank of Canada overnight lending rate on March 13 –  the second such cut in nine days – in response to the COVID-19 virus pandemic will “add fuel to the fire” in Vancouver's housing market and see some home buyers paying interest rates as low as 1.95 per cent

"This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the COVID-19 pandemic and the recent sharp drop in oil prices," the central bank stated. The statement added the bank’s governing council is ready to further lower rates if that is necessary "support economic growth and keep inflation on target.”

When questioned, Bank of Canada Stephen Poloz said even a negative interest rate is on the table but told reporters it would likely not be needed “because of our financial firepower.”

The leading rate reductions are part of a $10 billion stimulus package announced March 13 by the federal government.

The rate cut immediately reduced the BoC lending rate to 0.75 per cent, the lowest since the global financial crisis more than a decade ago.

“Those borrowers who have stuck with variable rate mortgages now look like geniuses,” said Vancouver mortgage broker Peter Kinch, “Someone who has a variable rate mortgage at minus 1 per cent would be paying a 1.95 per cent rate for a mortgage today” he said.

The rate cut will also affect the mortgage stress test, which was scheduled to be modified on April 6 to make it reactive to the average contract rate for five-year mortgage loans at big banks. The stress test had required a borrower to qualify at the posted five-year mortgage rate, plus 2 per cent, or at the Canada Mortgage and Housing Corp. rate of 5.19 per cent, whichever was higher.

Now, the mortgage stress test will be linked only to the current average contract rate available at   federally regulated banks.

A BIV survey March 13 showed this five-year rate is in an average of 2.42 per cent, which means a homebuyer would need to qualify at 4.42 per cent, the lowest level since the mortgage stress was expanded in January 2018 to include all home buyers.

“The housing market in Vancouver is already heating up and these rate cuts will add fuel to the fire,” said Kinch, head of the Peter Kinch Mortgage Team with Diversifi Alternative Investments Ltd.

Housing sales in Metro Vancouver soared 44.9 per cent in February compared to the same month a year earlier and were up 36.9 per cent from January, according to the Real Estate Board of Greater Vancouver, The composite benchmark price for a home is now $1.02 million, up 2.7 per cent from six months ago.

Finance Minister Bill Morneau, appearing on live national TV March 13 with Poloz and Canada’s banking regulator Jeremy Rubin, said he would deliver a fiscal stimulus package next week that will include an additional $10 billion in new funding to the country’s two business financing agencies — the Business Development Bank of Canada and Export Development Canada. The financial aid could be expanded: Morneau said the government would “do whatever it takes.”

Kinch said rumours are rife in the mortgage and banking sectors that one measure being considered is an 18-month suspension of the mortgage stress test.