Despite the COVID-19 pandemic raging on, fear in the financial markets is easing. And that’s exactly what new borrowers want to hear.
A host of lenders, including many of the big banks, have been dropping their mortgage rates in recent weeks.
This follows a run-up in mortgage rates in late March, a time when economic panic led most lenders to price “risk premiums” into their rates. The new downtrend is also indicative of falling market rates (e.g., bond yields), which lower funding costs for mortgage lenders.
Within the last week we’ve seen rate cuts from RBC, CIBC, as well as from a host of other non-bank mortgage lenders. The previous week saw rate drops from BMO, CIBC and HSBC.
Among other things, the decline in fixed rates reflects the federal government’s unparalleled measures to buy fixed-income securities, which in turn creates more buying interest (liquidity) in the mortgage funding market. That pushes down costs for lenders.
Consumers have been the winners in all of this. Uninsured 5-year fixed rates are now below 2.69% for the first time in weeks. Consider that in March, those same rates were over 3% at the big banks.
A plain vanilla uninsured 5-year fixed rate is now more than 225 basis points above the 5-year bond yield. In a normal functioning market, that spread would be closer to 150 bps. Seventy-five bps is a hefty difference in borrowing costs over five years.
It’s going to take time for these “risk premiums,” for lack of a better term, to subside.
In the meantime, lender costs will stay elevated. Albeit, lenders do have enough profit margin to discount fixed rates further, so we expect some pencil-sharpening in May, other things equal.
Should rates fall back to within that 150-bps spread from the 5-year bond yield, and bond yields remain stable, a new borrower with a $300,000 5-year fixed could save up to $17,000+ in interest over five years. That’s equivalent to almost a year of mortgage payments.