Canada’s prime rate fell to 3.45% today for the first time since July 2018.
This is good news for floating-rate mortgage holders and those with Home Equity Lines of Credit or regular lines of credit. And it’s all thanks to Canada’s big banks passing along the full 50-bps rate cut delivered by the Bank of Canada yesterday.
Many were expecting the banks to keep some of those savings for themselves to shore up their own balance sheets, but RBC Royal Bank led the way yesterday evening by announcing the full 50-bps reduction to its prime rate. The rest of the country’s big banks quickly followed suit, save for National Bank of Canada (as of this posting).
Another exception is TD Bank’s mortgage prime rate, which remains 15 bps higher at 3.60%, as opposed to its regular prime rate of 3.45% that applies to Home Equity Lines of Credit.
All of this followed the Bank of Canada’s decision to drop its overnight target rate by 0.50% to 1.25% on Wednesday—where it hadn’t been since October 2018—due to fears of a deepening economic downturn caused by the coronavirus, a.k.a., Covid-19.
“…The COVID-19 virus is a material negative shock to the Canadian and global outlooks,” the Bank said in its statement, adding that additional policy easing isn’t out of the question.
“…the outlook is clearly weaker now than it was in January,” it added. “As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”
Additional Easing Expected in April
Many observers and the markets at large expect the Bank of Canada to deliver another 25-bps rate cut next month, and potentially another quarter-point cut before the end of the year, which would bring Canada’s overnight rate to 0.75%.
“The growing risk of COVID-19 to the outlook suggests that the Bank of Canada will follow today’s 50-bp cut in interest rates with an additional 25-bps cut in April,” noted Stephen Brown of Capital Economics. “Given the Governing Council’s lingering concerns that looser policy will boost an already red-hot housing market, however, we think the Bank is unlikely to go further than that.”
Brian DePratto, Senior Economist at TD Economics, added the Bank’s move was “an important message…that the relevant authorities are ready and willing to act to support economic activity in the face of negative shocks.”
“And, as much as lower rates will further fan the flames of housing markets, the key five-year interest rate is in large part beyond the Bank of Canada’s control, reflecting global factors such as the Federal Reserve’s shock 50-basis-point cut [Tuesday] (and market expectations of further cuts south of the border),” he added.
What it Means for Mortgage Rates?
Yesterday’s BoC rate cut and subsequent fall in the prime rate will affect those with floating rates. But those looking for fixed mortgage rates will also see rates continue to decline due to the dramatic fall in Canadian bond yields over the past several months.
Bond yields, which lead fixed mortgage rates, have fallen from 1.69% since January of this year to under 0.90% today. Average fixed rates have subsequently fallen from a high of 2.50% in December 2018 to 2.44% currently, and we’re continuing to see lenders lower rates each passing week.
But the big winners yesterday were floating-rate mortgage holders, who will see their mortgage rates fall half-a-percent. That will result in interest cost savings of about $500 a year per $100,000 of mortgage, according to RateSpy.com.
Those with adjustable-rate mortgages will see their payments drop by about $24 per $100,000 of mortgage, while those with variable-rate mortgages will continue to make the same monthly payment but see their portion going towards principal increase while the interest portion decreases.
More Fuel for Home Prices
Coincidentally, on the same day of the BoC’s interest rate announcement, the Toronto Real Estate Board announced that the average home price in the Greater Toronto Area rose nearly 17% year-over-year in February to $910,290 (or $989,218 in the City of Toronto).
Home sales, meanwhile, were up nearly 46%.
Many have speculated that interest rate easing from the Bank of Canada would be added fuel for the country’s hottest housing markets, further driving up prices.
Not only that, but the Department of Finance announced recently it will be introducing a new qualifying rate for the insured mortgage stress test (those with less than 20% down payment) starting April 6.
That will make it easier for more buyers to qualify for larger mortgages (or qualify, period). That, in turn, will add to demand, which is already being driven by a lack of supply as well as buyers’ fear of missing out (FOMO) in certain hot markets.
“People are not concerned about coronavirus, people are not concerned about recession,” John Pasalis, president of Toronto property brokerage Realosophy Realty, toldBloomberg News. “The only things they’re worried about is buying a home—and if they don’t buy now they might spend more in the future.”
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