Back to Blog
30 Mar

So Why Are Mortgage Rates For New Loans Rising?

Latest News

Posted by: Aneta Zimnicki

So Why Are Mortgage Rates For New Loans Rising? From Dominion Lending Centres Chief Economist, Dr. Sherry Cooper, see link below to full article

My Summary:

The banks have reduced prime rates by 1.5%, but have hiked mortgage rates for new fixed- and variable-rate loans. These are extraordinary times.

The good news is that people or businesses with floating-rate loans are benefitting from the 1.5% rate drop.

The Saudis and Russians took advantage of the disruption to escalate oil production and drive down prices in a thinly veiled attempt to drive marginal producers in the US and Canada out of business. This has compounded the negative impact on our economy and dramatically intensified the plunge in our stock market.

Covid-19 has markedly reduced earnings of banks and dramatically increased their risk. Their stock prices have fallen very sharply, causing their dividend yields to rise to levels well above government bond yields. The gap between these two yields is a reflection of the investor perception of the risk confronting Canadian banks.

The banks are having to set aside funds to cover rising loan loss reserves, which exacerbates their earnings decline.  Lenders have also been swamped by thousands of applications to defer mortgage payments. The cost of funds has risen sharply.

Hence, the banks are tightening their belts. They slashed their prime rates but eliminated the discounts to prime for new variable-rate mortgage loans.  Banks have also raised fixed-rate mortgage rates as these myriad pressures reducing bank earnings are causing investors to insist banks pay more for the funds they need to remain liquid.

Financial markets have become less and less liquid–sellers cannot find buyers at reasonable prices. The ‘bid-ask’ spreads are widening. That’s why the central bank and CMHC are buying mortgage-backed securities in enormous volumes. That is also why the Bank of Canada has started large-scale weekly buying of government securities and commercial paper. These government entities have become the buyer of last resort, providing liquidity to the mortgage and bond markets.

These markets are crucial to the financial stability of Canada. Large-scale purchases of securities are called “quantitative easing” and have never been used before by the Bank of Canada. It was used extensively by the Fed (US) and other central banks during the 2008-10 financial crisis. When business and consumer confidence is so low that nothing the central bank can do will spur investment and spending, they resort to quantitative easing to keep financial markets functioning.

We are living through an unprecedented period. When the health emergency has passed, we will celebrate a return to a new normal. In the meantime, seemingly odd things will continue to happen in financial markets.