Mortgage Rate Outlook

The growing fears of the potential impact of COVID-19 resulted in a full market meltdown in late February, sending equity markets into free fall and global bond yields plummeting. On top of an already volatile situation, two of the world’s largest oil producers, Saudi Arabi and Russia, have engaged in a price war that sent oil prices to levels not seen since the late 1990s.

The panic sent Canadian bond yields down sharply and prompted emergency rate cutting by the Bank of Canada. Variable and 5-year fixed qualifying mortgage rates have followed bond yields lower with the 5-year fixed rate reaching 2.59 per cent, its lowest level since 2016 and very near its lowest level on record.

How prolonged and just how serious this outbreak will be is still unknown, which makes forecasting extremely difficult. What we do know is that the economy is in for at least a quarter of significant loss of economic output as measures to stop the spread of COVID-19, such as social distancing, sheltering in place and mandatory business closures, put a halt to economic and social activity.

Though mortgage rates have started rising as risk increases, we anticipate that measures implemented by the government, the Bank of Canada and other global central banks will help to calm fears over financial system liquidity and stem a longer-term spike in bank funding costs. As the economy recovers, mortgage rates will once again decline.

Of note, the Canadian government has postponed changes to the mortgage stress test. The qualifying rate for insured mortgages was set to change from the 5-year posted mortgage rate to the average 5-year fixed rate plus 200 basis points on April 6, with the B-20 stress test for uninsured mortgages to follow suit. By postponing this change, the government has muted the passthrough from monetary policy to the housing market, particularly since the 5-year posted rate has maintained at 5.19 per cent, despite the average 5-year contract rate falling to near historical lows. The impact of dramatically lower rates will still help those renewing or refinancing mortgages at lower rates by freeing up monthly cash flow due to lower mortgage payments.

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Provided by: BCREA

“Copyright British Columbia Real Estate Association. Reprinted with permission.”