With the Bank of Canada dropping its overnight rate by a full percentage point this month in response to the COVID-19 pandemic, it would seem to be a great time to shop for a new mortgage.
Not so, according to mortgage experts. In fact, advertised interest rates for new mortgage applications have been climbing significantly over the past few days.
In its March 19 update, mortgage comparison website RateSpy.com wrote as an example that TD Bank had just increased its advertised rates:
• three-year fixed: from 2.69 per cent to 2.89 per cent
• five-year fixed (high ratio): from 2.69 per cent to 2.79 per cent
• five-year variable: from 2.85 per cent to 2.95 per cent (no discount on the bank’s prime lending rate)
Alisa Aragon, mortgage broker with Dominion Lending Centres Mountain View, told Glacier Media in an interview March 20, “Lenders started increasing rates last Friday [March 13, the same day that the Bank of Canada made its emergency cut to the overnight interest rate]. That includes major lenders such as Scotiabank, TD, RBC. They’ve also been reducing variable-rate mortgage discounts on the prime rate, which is currently 2.95 per cent, so the discount on most variable rates is barely anything. In the future, we could see no discounts at all.”
She added, “The fixed rates are usually connected to the bond market, but because banks need liquidity right now, they’re increasing the rates.” The bond market had previously dropped in line with the central bank’s interest rate, but has also rebounded over the past couple of days.
Liquidity for the banks is a key issue for the federal government right now, which announced March 20 that it is introducing “changes will help provide stable funding and liquidity to financial institutions and mortgage lenders and support continued lending to Canadian businesses and consumers.”
This follows an announcement by the Ministry of Finance that it is launching “a $50 billion Insured Mortgage Purchase Program (IMPP)... The amendments allow mortgage lenders to pool previously uninsured mortgages into National Housing Act Mortgage-Backed Securities for CMHC to purchase these securities through the IMPP. The impact of this measure will provide financial institutions with more liquidity. This, in turn, will allow financial institutions to continue lending to businesses as well as individuals, while assisting customers who face hardship and need flexibility, on a case by case basis.”
By insuring previously uninsured mortgages, the government is essentially taking on the risk associated with those loans, freeing up banks’ balance sheets to provide more liquidity. The moves are intended to support banks while they offer such programs as six-month deferrals of mortgage payments to customers facing financial hardship due to the COVID-19 pandemic.
However, Aragon said that the program would not necessarily prevent banks from raising mortgage interest rates. “It depends on the bank’s balance sheets, every bank is different,” she said. “These are unprecedented times.”
Even though rates for new mortgages are currently rising, applicants are rushing to get a mortgage on the back of news that the Bank of Canada has slashed its overnight rate.
RateSpy’s March 20 update added, “Nearly every long-time mortgage broker we’ve talked to is swamped, with some saying they’re having their highest application volume ever for a March.”
Aragon is one such busy mortgage professional. She told Glacier Media she is also fielding countless calls from people who are asking about possible mortgage deferrals, even when they haven’t lost their jobs. She added that some are hoping to stop paying their mortgages so they can use the money to invest in the stock market while it is depressed. “That’s not how you do it,” she added. “These deferral programs are really for people who are struggling financially due to the pandemic, and those customers will be required to provide proof of hardship.”
RateSpy’s March 20 update confirmed this trend, saying, “We’re hearing of cases where people are using HELOCs [home equity line of credit] to buy stocks. These are presumably (hopefully) well-qualified, risk-tolerant clients with financial safety nets. It’s definitely not a strategy for the overwhelming majority.”