Central banks have cut their interest rates to the lowest level on record, and yields in the bond market have, for the most part, never been lower either. But a funny thing is happening in Canada’s mortgage market as lenders aren’t passing all of those potential savings on to borrowers.
Central banks around the world have slashed their benchmark interest rates to pretty much zero in an attempt to stimulate the economy by making it as easy as possible to borrow, spend and invest.
But a curious thing is happening in Canada’s mortgage market: rates aren’t going down by as much as they probably should be. And in some cases, they’re actually rising.
“Usually when the Bank of Canada cuts rates like they have, by 1.5 percentage points in a month, you can expect all rates to fall,” said James Laird, president of mortgage brokerage CanWise Financial and co-founder of Ratehub.ca.
“At first they did … but a week and a half ago, we started to see a shift [and] now we are seeing our lenders increase rates. Every two days, we get a different lender saying we are going up by point one, point two.”
Mortgage rates tend to move up and down based on a number of factors, but one of the main ones is the costs borne by the lenders themselves.
People tend to think that when someone walks into a bank to ask for a home loan, if they are approved, the bank just takes the cash out of some safe at the back, hands it over to the borrower and charges them interest over time to make a profit.
But, in fact, banks don’t keep that much money just lying around either — they typically borrow it themselves and make money on the spread between how much they’re charged for it and how much they turn around and charge the borrower for it.
Fear driving rate cuts
The cost of financing a variable rate loan is strongly influenced by the Bank of Canada’s benchmark rate, because banks tend to set their own prime lending rates based on whatever the central bank’s rate is.
The bank has cut that rate by 150 basis points — 1.5 percentage points — in the past month to try to make it as easy and cheap as possible for people to borrow, spend and invest to stimulate the economy that has been waylaid by COVID-19.
A few short weeks ago, it wasn’t hard to find a variable rate mortgage for something around prime minus one — a full percen