While the impact of COVID-19 on markets and the economy has been unprecedented, there has been one constant over the past year that has provided small comfort to Canadian consumers: an ultra-low cost of borrowing that has made it easier to qualify for mortgages and other forms of credit.
As the dust has started to settle on the economic shakeup and vaccines roll out, though, expectations are growing that interest rates will inevitably start to climb. Well, borrowers can rest easy for now, as the Bank of Canada (BoC) announced for the 10th consecutive time that their trend-setting rate will remain at 0.25%, and hinted they’ll leave it untouched until well into 2022.
However, a rosier-than-expected economic picture is prompting the Bank to assess some of the extraordinary methods it has used to keep the economy afloat. Here’s a look at what this means for borrowers, mortgage holders, and home buyers.
Stronger-Than-Expected Economic Performance
Today’s announcement reveals Canadian households and companies adapted well to the pandemic’s second wave, with oil prices and the job market strengthening in February and March.
Real estate prices have also been a significant contributing factor. Lockdowns have prompted buyers to upgrade to larger living spaces while extremely limited supply has put the boil on prices; the national average sale price rose by 31.6% year over year in March to $716,828, according to the Canadian Real Estate Association. This rapid price acceleration is a point of risk that the BoC is monitoring, and it acknowledges its ultra-low rate pricing has greatly influenced the market.
Canadian GDP is forecasted to grow 6.5% this year, and will trend higher through the next two years, up 3.75% in 2022 and 3.25% in 2023. However, the Bank acknowledges that resiliency has been uneven among different sectors of the economy, and that specific groups – such as low-wage workers, young people, and women, continue to be most vulnerable to financial fallout.
Variable Mortgage Rates Won’t Budge for Time Being
The main takeaway of today’s announcement is that variable mortgage rates will remain at their current record lows for the foreseeable future, as the BoC has not changed its trend-setting rate.
Referred to as the Policy Rate or Overnight Lending Rate, this is a benchmark that governs how expensive it is for the consumer lenders (BMO, Scotiabank, etc.) to borrow from each other, a key activity required to keep funds liquid among all the banks, and credit accessible to consumers. Most directly, banks use the BoC’s rate as a benchmark when setting the costs for their variable lending products, such as mortgages. Therefore, when the BoC’s rate is low and lenders borrow from each other cheaply, those savings are passed down to consumers in the form of low variable mortgage rates.
And those rates have indeed been kept at extraordinary lows. In response to the economic upheaval caused by the newly-minted pandemic, the BoC slashed its rate to 0.25% on March 25, 2020 in an unscheduled emergency announcement, shaving 0.5% from the 0.75% rate it had set just a week prior on March 16. This rate has stayed consistent through the pandemic.
As a result, mortgage borrowers have been able to access variable rates well below the 2% threshold: a five-year variable option can be had at 1.14% for insured borrowers (with less than a 20% down payment) and 1.3% for those seeking uninsured mortgages.
Keep an Eye on the Fixed Mortgage Rate Space
While the BoC is adamant that all interest rates will remain low in order to stoke the economy, they will be tweaking the levers that control the fixed cost of borrowing.
As a second prong in their COVID-19 approach, the Bank has been engaging in what’s called quantitative easing on a huge scale, pouring $4 billion dollars into the government and corporate bond markets in 2020 in order to keep the economy moving. This works by keeping the cost of bonds artificially inflated, and their yields low – a metric that is used by consumer banks to set their fixed cost of borrowing.
As we’ve seen over the past year, that has resulted in historically low fixed mortgage rates – as low as 1.68% for a five-year insured mortgage today. That has made fixed-rate mortgage options all the more attractive to mortgage borrowers, as the spread between available variable options is minimal, and they’ll get the peace of mind of locking in over their term.
Now, as conditions improve, the BoC plans to reduce their level of spending in the bond market to $3 billion, which will in turn lower the cost of these bonds and cause their yields to rise. While the initial impact will be extremely minimal – the Bank has clearly stated the change will be incremental to avoid shocks and will focus on two- and three-year debt instruments first – this could be where consumers will first witness rates on the rise.
The next Bank of Canada announcement is scheduled for June 9th, and their full economic Monetary Policy Report will come out on July 14th.
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