A quick briefing on recent mortgage rate developments:
- Higher Rates on the Radar: The market has now fully priced in a rate hike this year, based on the yields of interest rate derivatives. “Clearly this is no longer an economy that requires emergency-level interest rates,” says TD. Both it and CIBC predict the first 25 bps rate bump in October. But some analysts think it could happen as soon as the July 12 or September 6 meetings, given the BoC’s sudden urgency.
- What the Market Says: Two-year government bond yields typically lead Bank of Canada rate changes. That’s why the 2-year yield shot up following the BoC’s hawkish comments last week. The last time it was this high, the Bank of Canada’s key rate was 50 bps above today’s level.
- The Ceiling on Rates: The BoC’s previous rate hike cycle lasted just 75 bps before rates U-turned lower. Given Canada’s tipsy housing market, consumer debt burden, feeble wage growth, risk of an oil selloff, U.S. trade uncertainty and lacklustre exports, the BoC may choose to limit its increase(s) to 50-100 bps, then pause for a year or more to see the effects.
- It Could Soon be Prime Time: When the BoC does tighten, variable-rate mortgagors will be watching to see if the Big 6 banks:
- Rule Change Alert: OSFI is considering tweaks to the underwriting bible for Canadian banks (a.k.a., “Guideline B-20”). Proposed changes to B-20 will be published for public consultation in the coming weeks, writes the Bank of Canada. The biggest mortgage question of the year will then become: Will OSFI require banks to make all prime borrowers, even those with 20%+ equity, prove they can afford a payment at the posted 5-year fixed rate? The government already mandates this “stress test” for all insured borrowers. Bank competitors charge that OSFI would be creating a double standard and showing favouritism if it didn’t impose the same requirement on banks.
- Regulatory Pain: The Bank of Canada is acknowledging the cost that the Department of Finance’s recent insurance and capital rules are having on the mortgage market. In its recently released Financial System Review (FSR), the bank says: “Lenders are charging a…premium of around 10-20 basis points (bps) on some mortgages that are no longer eligible for mortgage [default] insurance.” If we assume the mean (15 bps), that’s boosted the cost of many uninsurable mortgages by at least $1,400, every five years. The average mortgage balance in Canada is $201,000, says Manulife Bank.
- Quote of the week: The vast majority of variable-rate mortgagors can handle rate hikes in stride, says mortgage DLC broker Dustan Woodhouse, who notes: “…In light of the federal government’s implementation of the 4.64% qualifying stress test…there is effectively a 2.50%-point buffer between [variable mortgage rates] and the qualifying rate…the equivalent of approximately 10 Bank of Canada rate hikes.“