While interest rates shouldn’t be your sole focus when securing a mortgage, they do represent an important part of the financing equation.
Since the COVID-19 pandemic began, the Bank of Canada (BoC) has announced several unscheduled benchmark rate reductions. In the month of March, interest rates were slashed three times from 1.75% to 0.25% – which the BoC refers to as its ‘effective lower bound’ – in an unprecedented effort to support Canada’s financial system and the economy. To help put this into perspective, it’s important to note that the BoC only schedules rate announcements every six weeks.
While an interest rate reduction is intended to stimulate a volatile economy, it seems the pandemic has other plans. In a pre-COVID world, lower interest rates would encourage consumer and business spending, and spur economic activity. These days, however, there’s virtually no spending.
But lower rates are having a positive effect where possible. They’re helping companies pay their employees and households meet their basic needs. They’ll help Canadians weather the current storm and lay the foundation for economic recovery once shut-down measures are lifted.
What does this mean for mortgage rates?
The BoC’s rates have a direct impact on variable rates and the current, low-rate environment has pushed them to the point of being even lower than their fixed-rate counterpart. This means that those with a variable-rate mortgage will likely benefit from a reduction in their monthly payments, or more of your payment will be applied to the mortgage principal versus interest portion of the mortgage.
In early spring, when the real pandemic ‘panic’ set in, prime rates were down, and fixed rates went in the opposite direction pushing them up higher than pre-pandemic days. Lenders were concerned about loan repayment and liquidity, which resulted in a risk premium to offset their potential losses.
To ease fears among the lending community, the federal government announced a variety of relief measures including a revision to their Insured Mortgage Purchase Program, which increased funding flexibility to financial institutions to ensure they could continue lending to consumers and businesses. This has led to a sense of security and lower costs for lenders who have, in turn, lowered their posted mortgage rates.
Mortgage stress test rates also dropped
Reduced interest rates have also impacted the much talked about stress test qualification rate. The mortgage stress test rate fell to 4.94% – the first time since January 2018 (when OSFI’s stress test began) that this benchmark rate has been under 5%. While the rate change isn’t significant for most homebuyers looking to qualify for a mortgage, every bit helps.
Our COVID world is unprecedented and predictions about the future are less than clear. The economic outlook will rely heavily on the control and containment of the virus. Yet, the drastic measures taken during the pandemic, including record-low interest rates, may have a dramatic impact when we reach the other side. When more businesses reopen and we start to live a new normal, the economic recovery could be long and unpredictable, just like the virus itself.
If you’ve been thinking about buying a home, now’s definitely a good time to start looking as rates are on your side.
Have questions about what this means for your mortgage or becoming a first-time homebuyer? Answers are a call or email away!