It may be tough times for the global and Canadian economies, but homebuyers are sure to love the cost of borrowing this month; an expert panel calls for discounted mortgage rates to stick around throughout the winter.
Will Dunning, Chief Economist at Mortgage Professionals Canada and a member of RateSupermarket.ca’s expert Mortgage Rate Outlook Panel, says Canadian government bonds – which set the pricing for fixed mortgage rates – remain in high demand, as investors seek out safe haven options amid a turbulent global economy. Should this continue, lenders will respond by further discounting mortgage rates.
“For five-year Government of Canada bonds, yields have recently been at incredibly low levels of about 0.70 per cent, versus about 0.95 per cent in November. Mortgage interest rates have not yet followed that drop,” he states in the panel’s consensus. “That said, if confidence does not soon rebound and bond yields stay low, then competitive pressures will build and we could see drops, say 0.15 to 0.20 points, for five-year fixed rate mortgages.”
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However, while downward pressure on government bonds means cheap mortgages for some, it could signify a warning that a second, more serious recession is on the way. As these bonds are considered to be the lowest risk of debt investments, investors flock to them when other forms of investments are deemed too risky. As a result, the demand for corporate bonds is dropping.
This is significant as it shows investors aren’t willing to invest in Canadian businesses, and are wary they could experience a downturn along with a faltering economy. As the spread (the difference between the yields offered on government bonds and corporate bonds) gets wider, it could indicate tough times are on the way.
It’s no secret Canada’s economy has experienced rocky conditions since the beginning of the year, as oil prices have not recovered as expected. Pain from the fallout is being keenly felt in oil province Alberta, resulting in mass layoffs and mortgage defaults.
While the consequences of low oil aren’t widespread throughout the rest of Canada, there’s concern the economy will fail to grow at a sustainable pace this year and next. It’s widely expected the Bank of Canada may have to cut rates in March to help stimulate the economy. “Canadian economic indicators remain mixed, showing just tepid growth in employment, lukewarm growth for retail spending (just barely ahead of inflation), and no growth in the manufacturing sector,” says Dunning. “Therefore, the odds have increased (to at least 75 per cent) that the March 9th meeting will see another quarter point drop in the BoC overnight rate.”
Currently, the Bank of Canada’s overnight lending rate sits at 0.5%. The central lender could lower it by another 0.25% in March, and the remaining 0.25% later this year, if it feels the need to do so. There’s speculation the BoC could even head into negative interest rate territory, as Japan and other nations have, should the economy falter further.
However, the Bank of Canada can only take monetary policy so far. It’s argued that Canada’s economic recovery must also be supported by the Liberal government through fiscal policy stimulus. The highly anticipated Federal budget, which will detail the extent of new spending (and the resulting deficit) is expected to be revealed in late March.
Panelist Dr. Ian Lee believes the Bank of Canada may wait to see what measures the government puts forth before taking action of their own. “Indeed, this will be the one of the most closely watched and scrutinized federal budgets in years. How much will the federal government stimulate the economy?,” he states.
“It is unlikely that Governor Poloz will reduce the central bank rate before the next budget expected in March.”
While it’ll be cheap to borrow in Canada for some time, those taking on mortgages need to be wary of the economic challenges that accompany low rates. Growing unemployment in some regions could threaten homeowners’ abilities to pay off their mortgages, and the potential for higher rates in the future could lead to affordability shock when those mortgages come up for renewal. Heed the “2%” rule when setting a budget for your mortgage, and avoid tapping out all affordability when interest rates are at record lows.