Variable Rate Update – June 2020

During the start of the lockdown due to the COVID crisis, banks hiked their variable rates discounts to prime – 0%.

At the time, we predicted that variable-rate discounts will improve significantly once again.

Well, very slowly now, we are starting to see this happen.

The lowest nationally available variable rate in Canada is prime – 0.60% (insured mortgages only). We anticipate that we will ultimately get back to prime – 1%, but it may take a while…..

We have started to also see cuts to some of the big banks fixed rates for 3, 4 and 5 year terms, in an effort to be more in line with the market.

Banks also (finally) seem willing to drop 5-year posted rates again. For instance, TD just lowered theirs to 4.84%. If two more large banks match, it could potentially ease the mortgage stress test another 10 bps.

For what it’s worth, on an RPS panel TD economist Derek Burelton said TD Economics expects rates at or near 0% until at least 2022.

RBC’s Robert Hogue says it will be well into 2022 before the economy is back to “where we were” (pre pandemic). He predicts that home prices will come under pressure in the fall.

CIBC’s Benjamin Tal adds that unemployment won’t go back to normal for years. Tal forecasts taht “we will be recovering into recessionary territory (of ~8%+ unemployment),”

Concordia University professor of economics Moshe Lander, told the Financial Post: “The Bank [of Canada] is worried about pushing below its effective lower bound. I think it should be unconventional in these unconventional times and try a 10 bps decrease and see what happens.”

If the BoC took his advice and banks also cut prime by 10 bps, it would be the smallest reduction in prime rate ever.

• • Specialist Tip: If you are shopping for a non-prime mortgage at a federally regulated lender, plan for a 1% lender fee as well. That’s the cost of doing business with a more risk-tolerant lender. Many refer to it as “the cost to self insure your mortgage”.

Consumer confidence has fallen to four standard deviations (SD) below its 2000-2019 average,” as noted by Capital Economics. Historically, consumer confidence and home prices often have an intimate relationship.

Vancouver prices seem to be holding up. The city’s benchmark home price was down just 0.7% versus April, amid sales that were 54.4% below the 10-year May sales average.

• CMHC’s Underwriting in Review: CMHC’s CEO recently hinted at tightening qualification criteria on default-insured mortgages. Where does that stand? “We are currently reviewing our underwriting practices,” say CMHC. “If and when a decision is made and we have something to announce, we will do so directly.” CIBC economist Ben Tal says, “I will not be surprised…if [the minimum] down payment on insured will go to 10%.”
• New Multi-Unit Loan Restriction: Effective May 28, 2020, CMHC is prohibiting refinances on 5+ unit properties if the funds are an equity take-out or are used to make distributions to equity holders. CMHC says its multi-unit mortgage loan insurance products could see additional “product repositioning” over the next few months. No details on what that might entail, but the housing agency says it will consult with industry before making any changes.
• Quotable: “We think mortgage deferrals are obscuring underlying consumer credit quality…”—RBC Capital Markets. (The Big banks have deferred $180 billion in mortgages during the COVID crisis.)