You Can Still Count on Rock-Bottom Rates, Says BoC

—The Mortgage Report: Nov. 27—

  • If you’re out there mortgage shopping, BoC chief Tiff Macklem had a message for you Thursday: “We want to be very clear, Canadians can be confident that borrowing costs are going to remain very low for a long time.” It’s a mantra he’s repeated for months.
  • Among the reasons: “…The economy still has more than 600,000 fewer jobs than it did before the pandemic.”
  • But he qualified his forecast, saying: “If it turns out that we’re wrong and there is more inflationary pressure than we expect, we will adjust [rate policy].” That “is possible, especially when there is a vaccine.”
  • Macklem was dismissive of the idea of negative rates, repeating that they are not being discussed. But he did concede, “We could potentially lower the effective lower bound, even without going negative. It’s at 25 basis points, it could be a little bit lower.”
  • That’s the most open he’s been about cutting Canada’s key rate from 0.25% to 0.15%, 0.10% or potentially zero. While the odds of that happening aren’t great, it’s much more likely that the BoC would stop at zero in this rate cycle, if it had to cut again, versus drive rates negative and risk disruption to the banking system.
  • The most likely outcome is that Ottawa keeps airdropping money to consumers and businesses hurt by the pandemic. That should (if we’re lucky) obviate the need for any further rate cuts.

The Bond-Buying Continues

  • This week, the Bank of Canada once again promised to keep buying bonds “until the recovery is well underway.”
  • Its 5-year bond purchases have helped keep 5-year fixed mortgage rates lower, given lenders benchmark fixed rates against bond yields.
  • But that doesn’t mean rates will stay where they are today. The BoC is not targeting a specific 5-year yield. Instead, it’s merely keeping the 5-year yield lower than it otherwise would be.
  • But, as the chart below shows, there are bigger forces at play than the BoC. One of them is U.S. policy. American yields continually lead Canadian rates.
  • Between the BoC’s weekly purchases of the 5-year bond, yields float freely in the open market. If U.S. rates surged, it would be unrealistic to assume the BoC would buy so much as to drive our yields right back down. The Bank does not want to make massive one-day adjustments to rates.
  • And the BoC’s bond-buying is not unlimited. Its own research suggests that once it owns more than 50% of a government bond, liquidity suffers, among other things. At the moment, it owns roughly 1/3 of Canada’s overall government bond market—so it’s got plenty more room to buy.
Canada 5yr Bond Yield vs. U.S. 5yr Bond Yield
Canada 5yr Bond Yield vs. U.S. 5yr Bond Yield

A Tool to Relieve Financial Anxiety

  • 46% of indebted Canadians say debt is adversely impacting their mental health. And 35% admit they were financially unprepared for the pandemic. That’s according to a new Manulife survey.
  • Fear of not making payments, particularly housing payments, is a stress that gnaws at you every day if you’re not financially stable.
  • We all know bad times can come out of nowhere. That’s why HELOCs provide such an important security blanket for so many people. They’ve been a lifeline to tens of thousands of homeowners during the pandemic.
  • If you’re concerned about income interruption, and are otherwise prudent with your spending and don’t already have a HELOC, maybe it’s time to consider one. HELOC rates are as low as 2.35% and there is no ongoing cost if you don’t borrow from them.
  • Spy Tip: If you have a mortgage too, having a HELOC means your closing costs may be higher if you choose to switch lenders at renewal.

Quick Hits

  • President-elect Joe Biden picked former Fed chair Janet Yellen for Treasury Secretary this week. Yellen is pro-stimulus, something that could speed the recovery in U.S. rates, and by association, Canadian rates.
  • The majority (71%) of Canadians are managing more of their finances online this year than they did 12 months ago, according to a Smarter Loans survey.
  • “On the loan growth front, mortgages have been the only category of
    expansion for banks, while other notable categories are either in outright decline (e.g., credit cards) or heading there (e.g., commercial).”—National Bank Financial


  • The decline in credit card business is probably related to a cautious approach taken by issuers rather than being driven by consumer behavior. Most issuers have been approving fewer credit card applications, and some even cut credit limits when the pandemic hit.

  • Sam says:

    I was not aware of that Ralph, but makes sense to the credit card companies. Does anyone think 1.49 to 1.74% 4 year fixed refinance is worth doing now, while breaking a 2.83% current mortgage at just under 15K penalty.

    • The Spy says:

      Hey Sam, If you can refi at 1.49% on a good 3yr or 4yr fixed fixed, that’s a tremendous rate. It would save you roughly $25,000 over three years assuming you don’t break early. That’s much more than the $15,000 penalty, which you might be able to reduce with a prepayment before discharge (confirm that with your existing lender).

      Disclaimer: This assessment is based on interest cost alone. Your personal situation is unknown and might dictate something different.

  • Sam says:

    Forgot to mention there is 3 years and 2 months remaining at $664.5K balance.

  • Pat Pell says:

    Our mortgage is up for renewal in March 2021. Can we renew now without a penalty?

  • Rita Palmer says:

    Hi Ralph,
    We are just in a process of renewing our mortgage. My husband had issue about his credit beau which gave him a under 6 for his credit beau
    But he declared bankruptcy in 2011 and it’s just a formality and will be off shortly. Our broker has given us a rate 4.49. Can we get it any lower? Our mortgage for 190,000. We live in Victoria,BC

  • Bill says:

    Sam, in 2 months plus a day, extend to a 3 year, usually no penalty to extend. Then breaking that new 3 year the penalty should be much lower.

  • Gary says:

    Hi I’m im up for renewal in March 2021. Scotia is offering me 1.90 5 year fixed and 1.78 variable. I have low 800 credit score and good income. Is it worth me shopping around or are those rates good? Thx

  • Sam Tinkle says:

    They are good, take it as their rates are being adjusted tomorrow.

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