Don’t mention it, but low rates have returned
Mortgages are still cheap despite Ottawa’s warnings
Don’t tell anyone — it seems we’re not supposed to talk about it too loudly — but mortgage rates have come crashing down again.
Ratesupermarket.ca says the fixed rate on a five-year mortgage has dropped to 2.94%, below the 2.99% rate that caused a furor earlier this year with Finance Minister Jim Flaherty warning banks not to get too aggressive with pricing.
“The record-breaking rate, offered in Ontario, appeared July 24 and is expected to return as the precedent has been set,” says Kelvin Mangaroo, president of Ratesupermaket.ca, who says his own surveys show the push is back on for a five-year mortgage.
Even the 10-year fixed-rate mortgage is getting more enticing, with a guaranteed rate of 3.76% for the next decade.
Vince Gaetano, a principal at monstermortgage.ca, says a number of lenders have quietly dropped back to 2.99%.
“The banks are not publishing anything yet but there are a couple that in certain situations will go to 2.99% on a five-year,” Mr. Gaetano says.
The real question is why rates aren’t even lower. The Bank of Canada may want consumers to take a tougher stand against their debt but the bond market, which affects mortgage pricing, continues to offer record-low yields.
The spread between the posted rate on a five-year mortgage of 5.24% and a government of Canada fiveyear bond is almost 400 basis points — the highest it’s been since the financial crisis in 2008.
“I truly believe [the real estate] market has softened and the banks want to make more margin,” Mr. Gaetano says. “The volume is just not going to give them their profits.”
Farhaneh Haque, director of mortgage advice at TD Canada Trust, says there is definitely discounting, or as she calls it, “relationship pricing,” but adds the bank’s costs are not based solely on bond yields.
“The cost of funds is impacted by liquidity premiums,” she says. “You don’t see that necessarily in the bond yields.”
There is also an ongoing threat from Mr. Flaherty of even tougher rules if the banks get too aggressive in their pricing.
“We want to make sure in light of all the guidelines we’ve had from the government that we are not getting into the price wars that the banks were in in the earlier part of this year,” Ms. Haque says.
The problem is these rates continue to be tempting for consumers, although the slowdown in housing sales in some major markets over the past three months indicates the lure may not be having the same effect.
But how do you say no to these rates, especially if you have a mountain of debt? This may be the best time ever to consolidate debt, if you can tame your spending at the same time.
It’s not clear consumers are doing that. Mr. Gaetano reports a rush to refinance, with many consumers pushing their home-equity lines of credit to 80% of their home’s value ahead of new rules from the Office of the Superintendent of Financial Institutions which limit that percentage to 65% for HELOCs.
Craig Alexander, chief economist at Toronto-Dominion Bank, said the bond market reflects the increased fear over Europe and the global economy. He says it can’t last.
“The level of yields don’t make any sense,” Mr. Alexander says.
“Traditionally five-year mortgage rates have a tight correlation with government bond yields. We are in an atypical environment, the level of bond yield is so exceptionally low it doesn’t appear to be sustainable. If you think about it, after you strip out inflation, investors are getting a negative return.”
Mr. Alexander says there is no question that while investors face challenges in today’s interest-rate environment, debtors have great opportunity. But he worries that people will use this opportunity to ratchet up their debt.
“What we don’t want is the level of rates to encourage people to take on new debt,” Mr. Alexander says. “Don’t abuse [this opportunity], take advantage of it.“
That’s the message Mr. Alexander says consumers should take away from the current situation. It’s unclear everybody will interpret the message of low rates the same way.