The credit market has been stabilizing and benchmark yields are ultra-low.  Yet mortgage rates don’t want to go much lower.  It’s somewhat frustrating for mortgage planners, and definitely frustrating for borrowers.

Earlier today we heard the following from a capital markets consultant and wanted to pass it along.  The numbers below are very approximate but it gives you a sense for why things are where they are.

As many of you know, mortgage rates have remained elevated because risk premiums are still high.  For example, we’re hearing that lenders are still currently paying the Canada Mortgage Bond yield plus 0.80-0.90% for fixed-rate mortgage funds.  That’s well above normal and it puts base 5-year fixed funding costs in the mid-3% range.  On top of this, lenders need to gross at least 1% or so.  That’s why deep-discount fixed rates are presently in the mid-to-high 4% range.

On the variable side, cost of funds is currently equal to bankers’ acceptance rates plus 1%–roughly speaking.  Add the mandatory 1%+ gross margin and that requires most lenders to keep variable rates slightly above prime.

On the face of it, it seems some lenders could lower rates if they wanted to.  Not surprisingly though, lenders are pricing based on the competition and no one wants to rock the boat.

The small non-bank lenders have it the worst in terms of funding costs.  Banks can get capital from deposits, GICs, CMBs, issuing notes, etc.  Non-deposit-taking lenders, however, need to rely on the Canada Mortgage Bond program for virtually all their mortgage funds.