Say the word “pandemic” and fear is the response. Not just fear for one’s health, but fear for your finances.

The coronavirus scare ratcheted up several notches Thursday as the World Health Organization declared a global health emergency. The move came as confirmed cases broke 9,000 (SARS had about 8,100).

The latest death toll is over 210 and growing. That begs the question, how bad could this get?

For mortgage shoppers, the answer will impact their borrowing costs.

For a sense of what might be next, it’s interesting to look back at the 2003 SARS outbreak. When the WHO declared a third global health alert on April 11 of that year (at which point there were “just” 2,781 confirmed cases of the virus and 111 deaths), the 5-year bond yield soon plummeted. It sank roughly one percentage point in the few months that followed.

That brought 5-year fixed rates along for the ride, and they too fell about a point. Albeit, other factors were at play including the Iraq invasion and a Fed rate cut in June 2003.

Cnada 5-year bond yield After SARS outbreak.png

Current Impact on Financial Markets

Dread over the quickly spreading coronavirus caused markets to tumble further on Friday. Stocks capped their largest weekly loss since August. Canada’s 5-year bond yield, which sways fixed mortgage rates, plunged to 1.28%, its lowest in over three months.

As a result, analysts piled on the worry.

Ratings agency Moody’s said the outbreak could “reverberate globally.”

RBC Economics said, “The outbreak is disrupting China’s economy, and those disruptions will have, albeit temporary, spill-overs to other countries, including Canada.”

Some (including a scientist who identified SARS) argue the impact could be far greater than the SARS outbreak—especially given the prevalence of social media. Information now travels the world in milliseconds, fuelling emotion before all the facts are in.

Impact on Mortgage Rates

Fixed mortgage rates end year lower.jpg

As investors flee stocks and move money into bonds, bond yields (which move inversely to prices) have taken a dive.

And falling bond yields inevitably lead to a decline in fixed mortgage rates. Big lenders responded this week with fixed-rate cuts.

Royal Bank of Canada was one of them. It was the first Big Six bank out of the gate this week with material reductions in fixed mortgage rates. It essentially reversed recent rate hikes and dropped its 5-year fixed rate by 15 bps.

As a result, rates could easily drop 15 bps from their current best levels. That would drop the best widely available uninsured 5-year fixed rate to 2.69% or less. We’re at 2.84% today.

Effect on the Next Bank of Canada Rate Decision

Bank of Canada (BoC)

The Bank of Canada is scheduled to deliver its next rate decision on March 4, where markets have priced a one-in-four chance of a rate cut.

Economists at RBC Economics are bucking those odds. They project the BoC will indeed lower rates at its next meeting, similar to how it did after the SARS outbreak. But the virus likely won’t be the impetus for the cut, they say.

“In 2003, uncertainty about the economic impact of the Iraq war (which also started early that year) and a case of mad cow disease that prompted the U.S. to ban Canadian beef imports meant the central bank probably would have cut rates with or without the SARS virus,” they wrote.

“Today, the negative economic fallout from the coronavirus in Canada will just add to an already soft economic growth backdrop that we think was already putting the BoC in position to cut the policy rate by mid-year.”

Either way, fixed mortgage rates stand to drop in the meantime.

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by Kanetix Ltd.

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