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Why Are Mortgage Rates Rising?

 

During the past month, mortgage rates have been slashed by the Bank of Canada.  They have lowered the overnight lending rate by a whopping 150 bps (1.5%) to a mere 0.25%.   Most believe mortgage rates would fall as well, but that’s not the case.  Most Canadian lenders have already reduced their prime rates by the full 150 bps.

However, since the second rate decrease on March 13th, lenders have hiked mortgage rates on both fixed and variable mortgages.  This isn’t typically what happens when the overnight rate is lowered.  COVID-19 has produced extraordinary times and uncertainty leads to risk premiums (in your mortgage rates.

The COVID-19 pandemic has disrupted the entire global economy.  Damages to business and consumer confidence will take time to recover.  The biggest issue is that no one knows when it will end.  The degree of uncertainty and the risk to public health has never been greater.

 

Unemployment Surges As The Economy Comes To A Halt

 

As most businesses ground to a halt, unemployment has surged.  Self-employed and hourly workers have found themselves with no income for an mortgageratesundetermined amount of time.  Everyone except essential service workers are isolating at home.  This group includes all travelers and students as well.  Nothing on this scale has occurred in the past century!  The emotional and societal toll will be immense.   Governments at all levels are introducing income support programs for those affected financially.  Although, no cheques are in the mail as of this writing.

During normal economic contractions, the moves are slow and often forecasted.  Our economy isn’t just simply slowing, it’s frozen in place and rapidly contracting.  Travel has stopped completely.  Trade and transport have dried up.  Manufacturing and commerce are on hold.  This is happening in all regions across the globe.

 

Oil Prices Falling At the Worst Time for Canadians 

 

Just as COVID-19 started wreaking havoc to our economy, the Russians and Saudis started a full out price war in the oil markets.  This is a veiled attempt to drive down prices to squeeze producers in the US and Canada out of business.  This has compounded the negative impact on our economy and helped intensify the plunge in our stock market.

Many Canadians are now forced to live off their savings if they have any.  The unlucky ones will be forced to live off credit as the assistance won’t cover 100% of the income lost.  The majority of Canadians have very little savings to fall back on.

The small bit of good news lies with the fact any credit tied to the Prime rate has become cheaper.  All major banks have decreased their Prime rates from 3.95% to 2.45%.  Most businesses with floating-rate loans have seen their debt costs reduced by 1.5%.  This helps to reduce the burden of dipping into this credit to replace lost income.

 

So Why Are Mortgage Rates Rising on New Loans?

 

The Banks are having to set aside funds to cover loan loss reserves, which exasperates their earnings decline.  The largest losses are coming from the oil sector as the price of oil crashes.  With so much uncertainty, default risks are rising sharply for almost all industries.  Some major industries affected include airlines, shipping companies, manufacturers, auto-dealers, retail stores, restaurants, hotels etc.

Lenders are facing thousands of requests to defer mortgage payments.

Faced with rising costs and falling revenues, the banks are tightening their belts.  Most lenders have eliminated any discounts from prime for all new variable-rate loans.  We have even seen some lenders charging a premium to prime.  Fixed-rate mortgages have also seen a re-pricing and are now much higher than a month ago.

Liquidity is drying up and the Bank of Canada is engaging in quantitative easing to add much-needed liquidity.  We are living through unprecedented times and look forward to a return to normal.  In the meantime, if you have any questions about your mortgage, please reach out anytime.