As the coronavirus pandemic worsens, the global economy will be forced further into recession.  At this point, it’s pretty much inevitable.  The Bank of Canada was forced to make an emergency, unscheduled, and massive 0.50% rate cut on Friday, March 13th, which came as shock to everyone. This was in addition to the 0.50% rate cut the previous week.  That’s a full 1% drop in nine days.  Huge. 

The BOC overnight rate is what prime rate is based on, which affects those with variable rate mortgages and HELOCs (Home Equity Line of Credit).  Fixed mortgage rates are influenced by bond yields, however the BOC rate can have an indirect effect on them.  

Widespread belief is that when the BOC cuts their rate, the fixed rates will drop as well. This is not the case however, which was proven in a large way this past Friday.  While the BOC was announcing their unexpected rate cut, US President Donald Trump was declaring a national emergency that would free up billions in funding to fight the coronavirus.  This was after Trump said that the coronavirus is a hoax created by the Democrats. (Yes, he actually said that). The speech sent the stock market soaring, which saw its largest single day point gain in history.  As the market soared, so did the bond yields, which rocketed upward, closing a whopping 43% higher than the previous days close.  This put immediate upward pressure on fixed mortgage rates. Some lenders immediately raised their fixed rates by as much as 0.25%, effective the following day.  

Most lenders have maintained the status quo. We are experiencing some of the largest market swings in history, so the lenders who increased rates on Friday may have jumped the gun.  The bond yields are down 20% today (at time of writing), which is relieving heavy upward pressure on rates.  Any rate increases Friday may be reversed soon.  Given the large swings we’ve been experiencing, this could reverse again by the end of the day for all we know.  As the pandemic worsens, I would bet that rates will decline further. 

 

US Fed Slashes Rate To 0%

Hot on the heels of the BOC rate cut, the US Federal Reserve took their own emergency action Sunday night by cutting their rate to range between 0% – 0.25%.  This was the second unexpected rate cut from the Fed this month.  This a major problem.  COVID-19 has wreaked havoc on global economies already, and it’s only going to get worse. 

These cuts were not made to keep our economies out of recession. That ship has sailed. We’re there already. The moves by the two central banks are intended to minimize the damage and to keep things from sinking further.  

But will it be enough? 

The next scheduled rate announcement from the BOC is on April 15th, but it’s unlikely that they will wait this long before making another cut. I would expect another ‘surprise’ rate cut from them soon. 

 

What The Coronavirus Means For Mortgage Rates 

The COVID-19 pandemic will get worse before it gets better. Extreme measures are being taken to prevent the spread of the virus.  New York City, Quebec, and Ohio have ordered all bars and restaurants to close.  Goodlife Fitness has closed all their clubs for two weeks (to start). Some mortgage lenders have completely closed their offices and are operating 100% from home offices, as is the case with other industries.  More will follow.  

Variable rate mortgages are starting to become highly sought after once again.  With the prime rate being driven downward fast, mortgage lenders are answering by reducing their discounts off prime rate. As of right now, there are variable rate mortgages as low as prime -1.25% for insured mortgages or prime -1.15% for those with 35% or greater down payment or equity (providing home value is under $1 million).  These discounts will be disappearing very soon, and it’s quite likely that prime minus rates will be soon gone altogether.  This is what happened following the US housing collapse in 2008, and this will be the likely scenario this time around as well. 

 

Will Banks Match The Rates Cuts From The BOC? 

The banks have not yet responded with cuts to their prime rates following Friday’s rate cut. This will likely come at some point today or tomorrow.  Will they match the full cut?  As this is a crisis, I would be quite surprised if they didn’t.  Especially considering that it’s no secret that more cuts will be coming.  As of right now, the prime is still 3.45%, but I would expect this to be 2.95%, potentially by the end of the day.  This would put the lowest variable rate at 1.70%. 

Keep in mind that we will get through this pandemic.  It’s just a matter of time.  And when we do, the prime rate will immediate start increasing.  For now, anyone with a variable rate mortgage will get to enjoy some of the lowest mortgage rates in history, providing you got in while the discounts off prime were still favourable.  

 

 

 

“Paul Meredith is the author of the Amazon #1 best selling book, Beat the Bank
– How to Win The Mortgage Game in Canada, and has ranked as one of the top
75 mortgage brokers in Canada since 2016. He was a finalist for Mortgage
Broker of the Year in 2018, and can be seen as the exclusive mortgage broker on
season two of TV’s Top Million Dollar Agent.”