Bond yields plummeted late last week as economic instability prompted investors to seek the safety of bonds.
This surge in demand drove Canadian bond yields to their lowest levels in two years, highlighting growing concerns about the economic outlook. Poor corporate earnings from major companies, a disappointing U.S. jobs report, and the unwinding of risky carry trades have shaken market confidence.
As rate expert Ryan Sims explained, investors rapidly sold off equities and other investments to repay loans in foreign currencies, driving up the value of those currencies and causing widespread losses across various markets.
“The problem is that the chaos it creates can make for a lot of volatility, and that volatility drives people to the safety of bonds,” he wrote in a recent post to subscribers.
“We saw bond prices up, and yields down this week—especially in the U.S. and Canada,” he noted. “This should lead to some rate reductions on Canadian mortgages—assuming we hold these levels.”
The Government of Canada bond yield fell more than 10 basis points (bps) on Friday alone, which was on top of the steady decline in the preceding weeks, which we reported on here: Fixed mortgage rates are falling again. Here’s why
Ron Butler of Butler Mortgages says Friday’s drop in yields is likely to push fixed mortgage rates even lower next week.
“The ongoing down trend [we’ve seen over] the last two weeks will accelerate,” he wrote on X (formerly Twitter).
In other news…
30-year amortizations become available for first-time buyers
This week, the federal government’s new rules allowing certain first-time homebuyers to take out 30-year amortizations, up from the previous limit of 25 years, came into effect.
The new rules, first announced in April as part of the government’s 2024 Budget, took effect August 1.
Earlier in the week, Finance Minister and Deputy Prime Minister Chrystia Freeland touted the changes as one of several ways the government is working to restore housing affordability for younger Canadians.
The new rule “translates to lower monthly payments so more younger Canadians can afford to pay that monthly mortgage on a new home,” she said during a press conference.
However, critics have pointed out that the percentage of buyers who will be able to take advantage of the extended amortizations is likely to be limited. This is because the extended terms are only available for those purchasing newly built homes, not resales. Additionally, insured mortgages, which require a down payment of less than 20%, are restricted to home purchases under $1 million.
For those who do qualify, the extended amortization will be the equivalent of reducing the mortgage rate by about 75-80 basis points (0.75-0.80%), according to BMO senior economist Robert Kavcic.
“For those that are able to actually access this, it’s a pretty meaningful change from a monthly payment perspective,” he said in an interview with Global News.
Posted rates falling, meaning higher prepayments for borrowers
Canadian posted mortgage rates are slowly easing, a trend that holds significant implications for mortgage borrowers, especially concerning prepayment penalties.
Last month, both the 3- and 5-year conventional posted mortgage rates by Canada’s big banks slipped 5 basis points to 6.94% and 6.79%, respectively. The 1-year rate fell 10 bps to 7.64%.
Posted rates are typically higher than the actual rates borrowers receive, which are the discounted rates after negotiations. For example, a bank’s posted rate for a 5-year fixed mortgage might be 7.00%, but the actual rate could be around 5.00%. This difference exists because posted rates act as a starting point and a way to calculate penalties and qualifying criteria. In contrast, actual rates are more personalized and reflect the competitive lending environment.
Why falling posted rates can be bad news for borrowers
Prepayment penalties, often calculated using the Interest Rate Differential (IRD) method, are directly influenced by posted rates. The IRD method compares the original mortgage rate to the current posted rate. With falling posted rates, the difference between the original and current rates widens, potentially increasing prepayment penalties for borrowers looking to break their mortgage early.
For instance, if a borrower locked in a fixed mortgage rate at 3.5% when the posted rate was 5%, and the posted rate now falls to 4%, the IRD penalty would be based on this rate difference. As posted rates decrease, the gap between the original rate and the new posted rate grows, resulting in higher penalties.
Matthew Imhoff, founder of Meticulous Mortgages and an expert on prepayment penalty calculations, drew attention to the impact of falling posted rates in a recent social media post.
“While I love that interest rates are coming down and what that means for new borrowers, I can’t help but worry about all those borrowers who have no idea where their IRD is,” he wrote in response to a recent reduction in posted rates by RBC.
“It means that anyone who got a 5-year fixed with RBC between September 27th, 2023, and December 19th, 2023, is in a position where the IRD is greater than 3 months’ interest,” he continued, adding that the exception is for those with a “ridiculously low” amortization period.
On the flipside, falling posted rates present an opportunity for new borrowers or those looking to refinance. Lower posted rates can lead to better mortgage deals and reduced borrowing costs.
St. John’s, NF, named best city for renters
St. John’s, Newfoundland, has come out as a top location for those looking for a place to rent, according to a recent survey by Point2Homes.
The survey looked at 100 of Canada’s largest cities and considered 24 different metrics, including rental prices, availability, affordability and overall quality of life to determine the best spots for renters.
St. John’s was followed by Sherbrooke, QC, and Quebec City. In fact, Quebec led the survey results with a total of seven municipalities being ranked among the Top 10 best places for renters.
The report notes that between 2011 and 2021, the number of renters in Canada increased by 21.5% to a total of 4,953,835 in 2021, according to figures from Statistics Canada.
“Among the nearly one million new renters nationwide, quite a few are probably residents whose struggles with high mortgage rates and prohibitive home prices keep them on the sidelines,” the report said. “However, many of them are also holding on to their renter status due to the flexibility and the mortgage-free, hassle-free lifestyle that renting offers.”
In terms of affordability, Wood Buffalo, AB, came out as the leader, with an overwhelming 82.8% of renters there spending 30% or less of their income to cover housing costs.
Ontario government addresses housing crisis with new measures
The Ontario government this week made two announcements it says will help address the province’s housing supply crisis.
On Tuesday, the government announced it is helping to build 1,000 new dedicated student housing spaces in London, ON, which it says will free up affordable homes in the city.
The province has exempted publicly assisted universities from the Planning Act to expedite student housing construction. These universities, like publicly assisted colleges, no longer need many municipal planning approvals, significantly reducing approval times, planning application fees and barriers to building higher-density student residences.
The government this week also released an Advanced Wood Construction Action Plan to expand wood construction in the province. This plan aims to use more wood in mid-rise and tall multi-family residential, commercial and industrial buildings. As part of the announcement, the government unveiled $3.46 million in funding to Element5, a mass timber manufacturer, to help the mass timber manufacturer expand its operations.
In its release, the Ontario government said that using mass timber and wood construction for modular and prefabricated buildings will be essential to achieving the government’s goal of building 1.5 million new homes by 2031.
In an email to members, Mortgage Professionals Canada (MPC) credited the provincial government with taking action to address the ongoing housing crisis.
“These announcements are a step forward in addressing the province’s housing needs and are a direct result of MPC keeping the pressure on government to increase housing supply through innovative solutions,” the email read. “Thanks to the Cutting Red Tape to Build More Homes Act, 2024, we’re seeing faster construction of new student housing, which will also free up affordable homes for individuals and families in the province.”
Mortgage snippets
- Consumer confidence remains “positive and stable:” Confidence among Canadians ticked up last week, driven by more positive sentiments when it comes to job security and real estate, according to a weekly survey by Bloomberg and Nanos. Its Consumer Confidence Index rose moderately to 53.34, up from 53.05 the week prior and approaching its 2024 high of 54.05. Canadians’ feelings towards the Canadian economy deteriorated, while they felt the same about their personal finances. The feelings on real estate rose to 49.80, up from a reading of 47.66 in the previous week and the 2024 average of 47.14.
- Which mortgage lenders and insurers are Great Places to Work? According to the 2024 Best Workplaces list, several mortgage lenders and insurers in Canada have been recognized for their outstanding workplace environments. Here are some notable names from the industry:
- ATB Financial
- Canada Guaranty
- CWB Financial Group
- FCT
- First National
- MCAN
- Scotiabank
- TD Bank
- Canada ranks fourth globally for the size of its homes: Coming in at an average of 1,948 square feet, Canada’s homes are among the world’s largest, behind only Australia, New Zealand and the United States. While Australia leads with an average home size of 2,303 square feet, Canada does boast a higher homeownership rate compared to these countries at 66.5%, according to the survey conducted by The Perfect Rug. That still trails other countries in the Top 10 list, however, with Malta boasting the highest homeownership rate of 81.9%, followed by Mexico (80%) and Greece (73.3%). The survey also found that Canadians not only enjoy spacious homes, but comfortable living conditions with an overcrowding rate of just 4.10% and only 3% of Canadians living in a household with 6 or more persons.
EconoScope: Key economic releases on tap for this week
| Country | Date | Time | Release | Previous Reading | Consensus Forecast |
|---|---|---|---|---|---|
| US | Mon, Aug. 5 | 10 a.m. | ISM Services PMI (July) | 48.8 | 51.3 |
| CA | Tues Aug. 6 | 8:30 a.m. | Merchandise Trade Balance (June) | -$1.9B | -$2B |
| CA | Wed. Aug. 7 | 1:30 p.m. | Bank of Canada summary of deliberations (July 24 meeting) | NA | NA |
| US | Wed. Aug. 7 | 3 p.m. | Consumer credit (June) | $11.4B | $10B |
| US | Thurs. Aug. 8 | 8:30 a.m. | Initial (Aug. 3) | 249,000 | 242,000 |
| US | Thurs. Aug. 8 | Wholesale trade (June) | +0.2% YoY | +0.2% YoY | |
| CA | Fri. Aug. 9 | Employment report (June) | -1,400 | 28,700 |
Last week’s headlines
Fixed mortgage rates are falling again. Here’s why
Proof of down payment: The biggest hurdle for mortgage professionals
Canada’s economy remains resilient, but for how much longer?
Ontario developer coalition asks governments for tax breaks to pass on to homebuyers
Greater Toronto condo rents see first annual drop since 2021
Mortgage arrears have yet to peak, but unlikely to reach long-term norm: BMO
30-year amortizations bond yields EconoScope Editor's pick fixed mortgage rates housing crisis latest mortgage news Matt Imhoff Mortgage digest mortgage rate trends Mortgage snippets Ontario government posted rates renters ron butler ryan sims
Last modified: October 22, 2024
