Robert McLister is a founder of RateSpy.com and intelliMortgage, and mortgage editor at rates.ca. You can follow him on Twitter at @RateSpy.
Imagine you’re a bank fearful of borrowers not paying you back, potential housing devaluation and surging costs to fund your mortgages.
The last thing you’d be thinking about is slashing your mortgage rates. You’d raise them. And that’s exactly what most mortgage lenders are doing.
COVID-19 has inflated lending costs, resulting in dozens of lenders lifting five-year fixed rates 10 to 25 basis points and slashing variable mortgage rate discounts by 50 basis points or more. (A basis point is one-hundredth of a percentage point.)
Fortunately, there are exceptions. HSBC, for example, has the lowest widely available rate in the nation, a variable at 1.84 per cent. That makes my suggestion last week still valid – go variable if you’re financially strong with ample savings. That is, until rate discounts from the prime rate shrivel up.
At that point, it might make sense to consider a short-term fixed rate instead. But we’ll cross that bridge when we come to it.
It’s very possible that rates won’t surge as much as they did during the 2008 financial crisis. The Bank of Canada, Canada Mortgage and Housing Corp., the Office of the Superintendent of Financial Institutions and the federal Finance Department have taken extraordinary steps to support lending.
They’re doing that by purchasing default insured mortgages and providing regulatory capital relief to banks, among other things. Had Ottawa not acted so resolutely, you could see another 50-plus basis point surge in mortgage rates by next month.
The rate landscape is changing fast
The lowest five-year fixed rates are still in the low to mid-2 per cents, but with surging bond yields and risk/liquidity premiums in effect, we could see them move higher for a while. That would only increase the relative appeal of a prime minus 1 per cent variable for well-qualified borrowers.
Most likely, fixed rates will revert lower once funding cost volatility dies down and lenders are confident the worst is over for housing. We should eventually see interest rates drop further as a recession takes hold. That reversal lower could take weeks or months. There’s no way to know, so lock in a rate discount ASAP if you need financing before August.
Many will fear the worst is ahead if we’re already in recession, like Goldman Sachs and Morgan Stanley predict. If so, it doesn’t take much historical research to learn that surging unemployment is emphatically bearish for housing.
Hopefully with the banks’ six-month mortgage payment deferral proposal Wednesday, this time is an exception. Hopefully Canadian real estate is not on its ninth life, but you don’t make money from hope.
If you’re out there shopping for a mortgage, note that:
- Lenders are at least two to three times busier than normal. And yes, application volumes for purchases are still high, meaning people are still buying homes.
- Given that more than half the mortgage industry is working from home, allow 30 to 45 days minimum to close. Remember, there will be fewer bankers for in-person meetings, fewer lawyers, fewer appraisers and so on.
- Lenders are triaging by underwriting purchases first, renewals second and refinances last. If you want a quick close on a refinance, good luck. Your best odds will be with a lender advertising higher rates.
- If you want a home equity line of credit, apply yesterday. Recessions are not conducive to great HELOC deals. Amazingly, you can still find HELOC rates near or below prime (2.95 per cent or less), which is illogical given we could see borrowers with income disruption tapping credit lines in record numbers.
- If you get a five-year fixed rate, try your best to pick a lender with a fair interest rate differential penalty. In a few years, you may need the flexibility to refinance or sell without huge penalties, even if you can’t envisage it today.
Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.