When markets take a beating the Bank of Canada notices. The Canadian stock market lost $100 billion in value this week. It’s now off about 20% from its June high. The deteriorating wealth effect could materially impact consumer spending if this trend continues. That’s on top of the general weakening economy and tightening credit conditions out there. All of this has got a number of analysts thinking the Bank of Canada will cut rates 1/4% as soon as October 21.
Borrowers next week will be asking, “Where’s the discount?” Lenders have been eliminating variable rate discounts left and right. Among others, FirstLine, TD, First National, and Merix have each raised their variable rates to prime rate. This has all happened in the last week or so. Very few in the industry thought the increases would be this big.
Several more lenders boosted mortgage rates today. Gone for now are the days of big discounted variables–at least temporarily. Whereas prime – .50 was an average variable rate a few weeks ago, now it’s a great rate–and fairly rare.
“It is costing banks more to get the money they lend to you. If they want to maintain profit margins, they have to transfer this extra cost to the consumer.” – CIBC senior economist Benjamin Tal (Globe)
“Overnight indexed swaps are pricing in a 76% chance of a quarter point interest rate cut by the Bank of Canada at its Oct. 21 meeting.” (CEP)
FirstLine is one of the more popular lenders with brokers. FirstLine, however, surprised a lot of us today when they cut their variable rate mortgage discount to zero. Meanwhile, FirstLine’s parent (CIBC) still shows prime – .37 for branch customers.
In general, we don’t recommend fixed mortgages over variables too often. Yet, if lenders are going to charge prime for a variable, borrowers should look very hard at the 4.99% fixed-rate mortgages currently out there. (Yes 4.99% fixed rates still exist, for now).
Lenders continue to pay above-normal rates for the money they lend out. The cost of this money is reflected partly in today’s wider mortgage spreads. The Globe reports that back in December 2006 the spread (i.e. difference) between 5-year mortgage rates and government bond yields was 2.59%, near its 10-year average average. Now it’s 4.05%!
“We’ve seen, by a number of measures, credit conditions deteriorate and some of the interbank markets tighten up significantly…We’ve gotten to levels we haven’t seen before in this cycle and some of that’s hit Canadian borrowing costs.” – BMO economist Doug Porter (CNBC)
“The cost of funding has increased quite considerably for the majors over the last few months – even last week.” – Rejean Robitaille, Laurentian Bank CEO (TheStar)
30-day bankers’ acceptance yields (which influence variable mortgage rates) continued their ascent today. They closed at 3.45%, up 0.35% from a few weeks ago. Lenders, especially non-bank lenders who get funding from banks, are feeling the pinch–and passing the pain to borrowers.
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