Emergency times. Coronavirus. Bank of Canada lowers overnight rate another 0.5%. ” Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.” News is evolving. Impact on mortgage rates to be determined.

Today, Bank of Canada (BoC) lowered their overnight rate by 0.5%. This quickly follows US Federal Reserve drop from yesterday’s emergency meeting.

We will have to wait and see if banks match the drop in the prime rate, which affects your variable rate mortgage. The last two times there was a rate drop (going way back to July 2015 and January 2015), the banks did not fully match the 0.25% BoC rate drop, each time only dropping prime rate by 0.15%. Otherwise, going back a decade, every other increase and decrease has been in lock step. So we have two precedents showing banks can go their own way. As well, the cost of funds for banks has risen with the surge in credit spreads, so they may not want to ‘pass on the savings’ to consumers.

An example change in monthly mortgage payments is $30/m per $100K mortgage balance, if full 0.5% drop. However, some variable rate mortgages do not change monthly payment with rate change, you will have to review your mortgage details.  A drop in prime rate also will affect your secured home line of credit.

The announcement paints a picture of rough times. Reference to multiple factors, including coronavirus, rail blockades, teacher strikes and winter storms.

“It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity……Meanwhile, business investment does not appear to be recovering as was expected following positive trade policy developments.”

BoC also mentions deferring to other economies.

“The Bank continues to closely monitor economic and financial conditions, in coordination with other G7 central banks and fiscal authorities.”

The next scheduled announcement is April 15. An unscheduled emergency rate announcement may not be out of the question. The US Federal Reserve did such that this week.

Finally the government has heeded to some common sense recommendations from the mortgage industry.  Effective April 6, 2020, there will be a slight modification  to the ‘benchmark rate’ used to qualify for insured mortgages.  This should reduce the qualifying rate by about 0.30% if contract rates remain at roughly today’s levels, and translates to about 3% more buying power.

Note, this affects only insured mortgages, meaning ‘high ratio’ less than 20% down payment purchase.  Only owner occupied (single family dwelling up to fourplex) or duplex to fourplex rental purchases can be insured.  As of 2018, insured mortgages accounted for less than a third of new mortgages.

Refinances and single family rentals cannot be insured, and fall into ‘uninsured’ category.   However, a similar qualifying approach for uninsured mortgages is being considered. A communication on this matter is expected by April 1, with changes effective on April 6.

Instead of the more ‘static’ rate approach currently, the new benchmark rate will be the weekly median 5-year fixed insured mortgage rate from mortgage insurance applications, plus 2%.  Perhaps this is adding more unnecessary government bureaucracy and complexity to the stress test.  Although it is a relief to see drop in qualifying rate, now how will buyers time their home buying decision, if rate is changing? Working closely with a mortgage broker is now even more important for this reason, as you can be advised  if your specific situation changes.

According Mortgage Professionals Canada, a more reasonable ‘stress test’  is closer to 0.75% above contract rate (as opposed to 2%). This is based on calculations that take into account income growth and mortgage principal payment over the term of the mortgage.   Current response from head of CHMC (Canada’s largest mortgage insurer, which regulates mortgage insurance)  Evan Siddall, “Calls to reduce the margin (from 200 to 75 bps) do not have traction at present.”  Things may change, as Siddall has announced his departure from CMHC.

We will get more practical clarity once April 6 hits and this test is applied to applications.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. More grim language used. “..there remains a high degree of uncertainty and geopolitical tensions have re-emerged, with tragic consequences” “Governing Council will be watching closely to see if the recent slowdown in growth is more persistent than forecast.”  Next announcement is Mar 4.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Hinting at ‘stable’ rate. “The Bank continues to expect inflation to track close to the 2% target over the next 2 years.” A 2 year projection, in my opinion, is too forward reaching, anything can change in the meantime. Next announcement is Jan 22.

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Bleak outlook. “The Bank continues to monitor the evolution of financial vulnerabilities in light of lower mortgage rates and past changes to housing market policies. Governing Council is mindful that the resilience of Canada’s economy will be increasingly tested as trade conflicts and uncertainty persist.” Next announcement is Dec 4.

The election is over. What does this mean for mortgages? Some good insights (summarized from source Mortgage Professional Canada):

Mortgage rules and related policy will not be a top priority for Trudeau government.

Most likely Liberals will implement their national tax on vacant residential properties owned by non-Canadians who don’t live in Canada, likely in spring budget.

The promised increases to the FTHBI (first time homebuyer incentive) in Toronto, Vancouver, Victoria would be welcomed but may not be immediately forthcoming. Push and pull between various levels of policy makers, with fear of increasing housing demand and therefore prices.

Not expected Liberals to consider insurable 30-year amortizations as policy independently, but in a minority government, opposition allegiances can set the agenda of the day.

It is also possible that the FTHBI could be replaced by 30-year amortization, but for now, forsee FTHBI surviving through this Parliament, at least.

Proposal of removal the mortgage stress test on renewals or switches (note, not on purchases or refinances) on the table, seems like all 3 party caucus members generally supportive of this, but nothing certain yet.

Recent announcement of the regionalized adjustments to FTHBI for Toronto and Vancouver may point to government being open to more regionalized policies, not just a “one-size-fits-all” national policy.

While many Canadians will want to see action, minority governments last longest when they keep it simple, and not act too boldly. No party wants another election so soon. Regardless, the mortgage industry will not wait and continues discussions with all parties.

Staying put before the election. Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Economic outlook is weak. Comment made about justifying current mortgage rules. Next announcement is Oct 30, days after the federal election.

“Given this composition of growth, the Bank expects economic activity to slow in the second half of the year.”

“Housing activity has regained strength more quickly than expected as resales and housing starts catch up to underlying demand, supported by lower mortgage rates. This could add to already-high household debt levels, although mortgage underwriting rules should help to contain the buildup of vulnerabilities. “

Bank of Canada holds the rate steady. Your variable rate mortgage remains unchanged. Sombre language used. The general speculation is that there is possibility of rate dropping. We will have to see if the boat will be rocked before the federal election. Next announcement September 4.

Summary of mortgage related items in the budget:

The federal budget announced a new first-time home buyer incentive. It is essentially a ‘shared mortgage’ or interest-free loan to be repaid when the property is sold. Loan of 5% (existing home) or 10% (new build) of purchase price on insured purchases with minimum 5% and maximum 20% down payment. Maximum household income of $120K, and purchase price no more than four times the buyers’ household income. This translates to maximum price of $505K. Borrowers still must qualify under the existing stress test. Details on exactly how this repayment will look like was not presented, ‘more details released later this year’.

The RSP first-time home buyers plan (HBP) limit is increased from $25K to $35K.  Can be used towards a down payment on a purchase. Repayment timeline is unchanged.

My interpretation:

• This does not address much the issue of supply of housing.
• It creates an already existing competition for entry level housing, as the maximum price translates to $505K (and can be lower, depending on your household income).
• It shuts out most expensive regions like Toronto and Vancouver, due to their higher home prices.
• Since this is still a ‘loan’, it just pushes borrower’s debt to the future, as they have to repay once property is sold.
• This adds risk to the taxpayer, as the government-backed ‘interest-free home loan’ is tied to real estate values. What if values go down? Isn’t this the space the government wanted out of several years ago, and now they are back in the real estate business?
• There are no specific details on how the loan exit will work. Let’s worry about that possibly ‘after the election’.
• Their published example of a $400K home purchase with the incentive yielded a monthly mortgage payment reduction of approximately $200. If they just reverted back to allowing 30 year amortization from 25 years, it would be a similar reduction. Why create complexity, new bureaucracy and programs instead of letting go.
• Similar local down payment assistance programs have been commented on as not as widely used as expected.
• The increase in HBP can benefit some, but many younger first-time home buyers don’t have that much saved up anyway.
• Although the government claims to listen and rely on industry experts, much of what was said from the mortgage industry fell on deaf ears.
• A focus on strengthening our economy and jobs could be a better approach to address issues with debt loads and affordability.

We will have to wait and see the effects and market reaction.