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Bond Yields Break 1%; HSBC Slashes Mortgage Rates

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Five-year fixed rates fell to their lowest level since November today as HSBC Canada slashed its promotional mortgage pricing.

HSBC, which has fashioned itself into an online mortgage juggernaut, launched a slew of new specials that lead the market. One of them is a 1.99% 3-year fixed rate for default-insured mortgages. (More on HSBC’s mortgage specials.)

Meanwhile, bond yields—which heavily influence fixed mortgage rates—took a dive again today. For the first time since June 2017, Canada’s 5-year government yield broke the psychologically imperative 1.00% level before recovering late in the day.

What Banks are Doing

Big banks have thus far held off on slashing rates, and for good reason. According to one capital markets pro we spoke with this morning, "This feels more like 2008 than the last few years."

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In other words, there’s concern about how the coronavirus could slow economic growth, cause job losses and potentially increase credit risk for banks.

That, in turn, is raising banks’ funding costs in the bond market, relative to the government’s funding costs. Factors like stubbornly high deposit rates, rising loan loss provisions and upcoming hikes to securitization costs (i.e., government fees lenders must pay to sell mortgages to investors) are raising the overall costs to fund a mortgage. That, and their usual practice of waiting till market volatility dies down, is why most banks aren’t keen on quickly dropping mortgage rates to match falling yields.

But give it time. Barring an explosion of coronavirus cases in North America and barring panic over a painful recession, fixed mortgage rates should adjust.

Next Up for Mortgage Rates

Another shoe could drop in the rate market. The stock market is rebounding nicely, but bond yields not as much. The latter is a much better forecaster of what’s ahead.

This morning, Canada’s 5-year yield dipped below 1.00% for the first time in two-and-a-half years. Competitive 5-year fixed rates generally sell for roughly 1.50%-points above the 5-year yield, so we could ultimately see closer to 2.49%. That’s barring any surge in lender risk premiums.

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Typical uninsured 5-year fixed rates are currently in the 2.79% neighbourhood, so they have room to drop. And, with bond yields signalling a slowing economy, that could potentially pull yields and fixed rates even lower. (That's not a prediction, just a possibility.)

On Wednesday, the Bank of Canada is expected to chop its key rate by ¼%-point—if you believe bond market forecasts. The market expects another ¼-point cut in April. If the BoC eases both times, and market risk premiums don't explode, fixed rates should drift meaningfully lower than they are today.

Qualifying is Getting Easier

The government’s mortgage stress test improvements mean it should get easier to qualify for a mortgage come April 6, the implementation date.

If the 5-year yield remains around 1% and mortgage spreads hold constant, we could ultimately see the qualifying rate drop as much as 50-65 bps, to as low as 4.54%. That could potentially boost borrowers' purchasing power by at least 5-6%. That in turn would let people pay over $25,000 more for a home, assuming no other debt, $95,000 in income and 5% down.

More fuel on the real estate fire…