One-year Rates as Low as 1.99% IF Your Mortgage is Insured

The Mortgage Report – Weekend Edition

  • More Sub-2% Rates: For default-insured borrowers, there’s now up to three mortgage terms in the magic 1% range, depending on your province. They include the one-year fixed, three-year fixed and variable. In coming weeks, more borrowers could strategically choose shorter fixed terms to:
    (a) wait for better variable-rate discounts in 2021, and/or
    (b) get the lowest rate they can, on the assumption the Bank of Canada won’t hike rates until at least 2022.
    Meanwhile, the lowest uninsured rates remain stubbornly above the 2% threshold, with 2.14% to 2.20% variables leading the pack. Given time, short-term uninsured rates could also break the 2% floor.
  • Psychological Damage: “The worry…is that the very public [home price] warning from the crown corporation [CMHC] becomes self-fulfilling,” says Capital Economics. “With the CMHC’s alarming forecasts covered by all the major news outlets this week, some Canadians have probably become far more concerned about prospects for the housing market.”
  • Credit Tightening Ahead?: The Spy’s thoughts, via BNN
  • Less Competitive Renewal Rates: A bank exec told us this week that borrowers with deteriorating credit and/or falling home values may be offered worse rates than usual as banks try to prepare for coming losses. It’s become fairly common for big lenders to monitor your credit and property value (using automated valuation systems) after closing, in order to manage their portfolio risk and capital requirements. When you reach renewal, they’ll already have a rudimentary picture of your risk as a borrower, even without you re-applying.
  • Inflation’s Return: “In the next year or two, I think the discussion will be deflation, not inflation,” CIBC economist Benjamin Tal told the National Post. “However, I think as we reach 2022 or 2023, there’s a risk, to some extent, of inflationary pressure.” If he’s right, we’re likely looking at 18-30 more months of ultra-low rates, minimum.
  • Half Full or Half Empty: “I do think that, on balance, the flow [of pessimism] that I’m hearing is a little too dire. It’s a little overblown,” said BoC chief Stephen Poloz this week. Meanwhile, his Deputy Governor Timothy Lane warned COVID’s economic damage will likely be “profound and long-lasting.”
  • Rate-Cut Clue: As much as the Bank of Canada dismisses the likelihood of negative rates, Lane said something interesting Wednesday: “As restrictions are lifted, monetary policy will continue to manage the risk that inflation could deviate persistently from its target in either direction.” Morgan Stanley took that to mean more rate cuts may be coming.
  • Lay of the Land: RBC Capital Markets’ Canadian Housing & Mortgage Virtual Conference had a slew of lenders and industry-types in attendance this week. Some of their highlights:
    • Close to 30% of non-prime mortgages are deferred, over twice as many deferrals as prime mortgages.
    • Most lenders have lowered maximum loan-to-values, typically by 5% or so, either nationwide or in high-risk regions.
    • As expected, lenders are seeing appraisers be more conservative on values.
  • Bad Loans: Banks are setting aside record amounts for bad loans and their earnings could be the worst in decades. That is not conducive to generous mortgage discounts. As we speak, Big Bank rates are near 2.49% for most 5-year fixed mortgages. That’s 52 bps more than normal, relative to their basic funding costs (as measured by a 10-year average of 5-year swap rates). Banks may continue selling mortgages at above-average markups until we see fear of delinquencies dissipate. With bank stocks still underperforming and credit spreads (the extra banks must pay to borrow, compared to the government) still inflated, the market is telling us that the peak delinquencies are still months away.
  • Deferral Leaders: Alberta and Quebec account for over half of all deferred mortgages with default insurance. (CBC)
  • One Failing of “Average” Prices: “…During market downturns, the proportion of higher-value homes that are sold often falls significantly,” says Capital Economics. “That in turn pulls down the average selling price,” making price drops seem worse than reality. That’s why some follow Teranet-National Bank’s HPI, which compares prices for the same house over time. Unfortunately, due to its methodology, the HPI has a lag in data reporting—which in itself can be deceptive.
  • CEBA Issue: Some banks are assuming a 3% ($1,200) payment when calculating a mortgage applicant’s debt ratios, if that applicant is self-employed and has received the Canada Emergency Business Account (CEBA) loan. Broker Shawn Stillman of Mortgage Outlet tells us that mortgage underwriters are characterizing the loans as “unsecured liabilities, even though the borrower may not be personally liable [for the loan].”
  • AAA at Risk: Canada’s record $400+ billion 2020 deficit “could jeopardize” its status as one of seven countries with a AAA credit rating, says Macquarie. Loss of AAA status could boost Canadian bond yields “slightly” in knee-jerk fashion, David Doyle, Macquarie North American Economist tells us. But the effect would be “limited,” he says, particularly if the Bank of Canada keeps buying bonds and yields keep falling with a weak economy. Rate Impact: Potentially slightly bullish



6 Comments

  • BaySt says:

    What does a 1 year fixed mortgage cost a bank when the overnight rate is 0.25%?

    • The Spy says:

      Hi BaySt, Prime 1yr mortgages are typically funded with short-term liabilities like deposits, 1-year GICs, bankers acceptances, etc., which currently range around 50-60 bps or less for big balance sheet lenders. Less liquid lenders pay more. That’s just the base funding cost. As David64 notes, a bunch of other costs get layered on top.

      Suffice it to say, there’s ample margin in 1yr loans for banks right now.

  • Vincent says:

    But when is the 5 year fixed going to break the 2%

    • The Spy says:

      Hey Vincent, There’s a chance we could see a 1.99% 5yr fixed this summer or by the end of the year. It’s hard to say so I wouldn’t rely on it.

  • David64 says:

    @BaySt
    Banks have so many other expenses, and overnight rate is one of them. Who do you think pay for staff, branch rents and other ongoing expenses?
    After all it is business…

  • David64 says:

    @Vincent
    That is a million dollar question. It depends on so many things. If market doesn’t get more volatile, maybe in 3 to 6 months is my guess.

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