Why are mortgage interest rates rising when the Bank of Canada continues to drop the Prime Lending Rate?
In January 2020 the Bank of Canada prime rate was 3.95%, since then we have seen multiple drops and the prime lending rate is now 2.45%. Normally, we would see mortgage rates drop after a drop in the prime lending rate, but the market is anything but normal these past few weeks. We have seen Fixed Rates increase and the discount on Variable Rate mortgages has decreased.
If you were refinancing your home on Monday, March 2, 2020, we would have been looking at 5 Year Fixed Rates of around 2.99% and 5 Year Variable Rates around Prime -.65%. Today, April 7, 2020, refinance rates have increased to 5 Year Fixed Rates of 3.14% and 5 Year Variable Rates of Prime +.20%.
WHY? It’s all about risk, uncertainty, and liquidity. Even though the Bank of Canada has dropped the lending rates to try to stimulate the economy, lenders are facing an unprecedented amount of borrowers needing to defer their mortgage payments. Lenders need to address this risk and their way of doing that is to increase rates to allow them to make more money to be able to create a bit of a safety net to address the potential that these new mortgages may default or need to defer. With borrowers losing jobs and income, there is a higher chance that some borrowers will need to rely on their savings and unsecured debt to support themselves, there is fear that the amount of borrowers defaulting will increase as we are all staying home and staying safe.
With a higher amount of mortgage payments being deferred and potential defaults, the lenders ability to raise funds as a mortgage company also becomes impacted. As Covid-19 impacts employment and our ability to repay our debts, the usual safe investment environment is now not as safe of an investment as it once was.
If your mortgage is up for renewal, you are considering refinancing, or shopping for a new home, we know that you have a lot of questions and we are here to help answer them all.