Fear of a Second Wave Pushes Down Rates

The Mortgage Report – June 12

  • Double-dip: As is often the case, bad news for the economy is good news for interest costs. Investor worries over a potential second wave of COVID-related shutdowns helped push 5-year Canada Mortgage Bond (CMB) yields to an all-time low on Monday. Recent Bank of Canada buying might have also helped. The reason this matters is because lenders use government-backed CMBs, a form of securitization, to cheaply fund mortgages. Lower yields coincided with a fresh all-time low for 5-year fixed rates: 1.90%. That’s an effective rate, including cash back, and it has caveats. Among other things, it’s limited to high-ratio purchases closing in 45 days in certain provinces. Nonetheless, it’s a hint that uninsured rates could also edge lower, barring any blockbuster vaccine news.
  • Hit-and-Run: After just 10 days, HSBC has pulled its 1.75% insured variable-rate offer. The bank replaced it with a 2.14% 5-year fixed rate — which applies to switches from another lender that close within 60 days. No word on why HSBC yanked its variable promo so fast, but a handful of brokers are still offering a similar deal (prime – 0.70%) on an effective rate basis.
  • Almost a Nothing-burger: “It is a peculiar time [for CMHC] to put the brakes on [housing],” says Royal LePage’s CEO. Fortunately, CIBC estimates CMHC’s insured rule-tightening will only impact 3-4% of mortgage originations.
  • Real Estate Awakens: Listings surged by a record 69% in May. The national average home price rose slightly from April and dropped modestly (2.6%) versus a year ago. Thanks to surging sales, months of inventory sank from 9.05 in April to 6.64 in May, which is about 8% above the 10-year average. Despite the pop, sales were the lowest since 1996.
  • Mind Those Pre-Approvals: “Ensuring that you have an up-to-date pre-approval is very important,” in this market, cautions Jason Davenport, Branch Manager at Meridian Credit Union. “If you have one from Pre-COVID, I would not assume it is still good.” He suggests paying special attention if you:
    • Have a down payment from borrowed funds for a rental property. (“That used to be fine. Now, a lot of lenders are no longer accepting it,” he says.)
    • Got your pre-approval based on self-employment income, overtime or bonus income (which may be heavily scrutinized because of tighter internal lending guidelines).
    • Are currently receiving CERB (because you will likely not be approved at most lenders, he says).
  • Harder Hit: Some say “Canadians with short credit histories, like millennials and new immigrants – two economically important groups – will be unduly disadvantaged by the changes.” Canada’s biggest non-bank lender correctly notes that for those “who are trying to establish themselves in a new country” a low score often “has nothing to do with their credit-worthiness.”
  • Soft Rental Market: A shrinking pool of potential renters and new supply from AirBNBers are contributing to lower rents. But the effect should be temporary, lasting perhaps quarters but not several years. Rents could turn back up, as they did in much of the U.S. soon after the Great Recession, as:
    • people get back to work
    • some would-be buyers shift to rentals (because they can’t qualify for a mortgage, or don’t want one – if home prices weaken)
    • immigration ramps back up
    • travel resumes and alleviates pressure on Airbnb landlords.
  • Fun Fact: 90% of deferred mortgages have a credit score over 680 (the typical minimum required to get the best rates). Source: CIBC


  • WillyBaldy says:

    Anyone has an opinion on potentially switching from a variable 5 years mortgage with MCAP @ 1.85%, 20 months left to the term, to HSBC 5 years fixed @ 2.15%? The penalty would probably be three months interest with MCAP with some other break free, on top of the ~$700 appraisal fee from HSBC. It’s a head-scratcher for me, that low fixed rate is very tempting.

    • The Spy says:

      Hey Willy, What did MCAP quote you for its 5yr fixed rate (if you convert with no penalty)? And why do you want to lock in?

  • Robert Rich Appleton says:

    HSBC appraisal fee is $300 if that helps

  • WillyBaldy says:

    Hello Spy, MCAP quoted me 2.54% for 5 years fixed, and 2.24% for 4 years fixed. I was really surprised there’d be that much difference between the two. I was quoted after writing a message here, and they’ll call me back so that I can bargain a bit.

    The reason why I’m contemplating locking in is that I’m a bit skeptical that fixed rates will be that low in ~20 months. Would you say that the odds favour fixed rates to be as low or lower in 20 months? (knowing we don’t have crystal balls)

    PS: Thanks Robert, good to know!

    • The Spy says:

      Hi Willy, If you have to lock in, that 2.24% rate isn’t bad given: (A) there’s no penalty, (B) the savings vs. a 5yr is material, (C) it’s the lowest 4yr conversion rate I’m aware of, and (D) a 4-year is more flexible.

      I’d be hesitant to try and outguess the market, though. FWIW, six economists polled by Bloomberg expect a roughly 68 bps pop in the 5yr yield by Q4 2022. But that and a nickel is worth five cents.

  • WillyBaldy says:

    Thank you Spy, really appreciate your input.

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