MORTGAGE RATES TO NEAR-RECORD LOWS

First-quarter Canadian mortgage rates continued to decline in 2009 to the benefit of consumers. The posted one-year borrowing cost on a fixed term mortgage fell to 5.00 per cent at the end of February, marking a 195 basis points (bps) decline since July 2008. The five-year fixed term mortgage rate fell to 5.79 per cent in February, down 141 bps from October 2008 (Fig.1). BCREA forecasts near-record low mortgage rates in the next four quarters, as weak economic conditions and low inflation contribute to lower interest rates in Canada.

On March 3, the Bank of Canada (BoC) cut its target for its key overnight interest rate by 50 bps to 0.5 per cent as the global economy worsened and domestic demand pulled back. On a cumulative basis, the target overnight rate has been cut by 400 bps since December 2007. Despite the current low level, futures markets are pricing in a further 25 bps cut. The BoC noted in its March 3 communiqué that “the overnight rate can be expected to remain at this level or lower at least until there are clear signs that excess supply in the economy is being taken up.” Given the continued deterioration in global economic conditions, particularly in the US, BCREA expects the BoC to lower the overnight rate to a floor of 0.25 per cent on April 21.

A decline in short-term interest rates and minimal risk of inflation in the near future should set the stage for further downward pressure on mortgage rates. Variable mortgage rates, which generally move in lock-step with the prime and hence the overnight rate, should reach a bottom after the BoC’s next interest rate announcement on April 21, notwithstanding rate discounts or premiums offered by financial institutions.

Fixed term mortgage rates, which are closely related to bond yields and deposit rates of similar maturity, should decline as the inflationary risks associated with higher potential interest rates in the future subside with the weakened economy. Meanwhile, tight credit market conditions are expected to improve, albeit slowly, lowering the cost of mortgage market funds raised in capital markets. The potential for an improvement in economic conditions in 2010 will lead to modest growth in interest and mortgage rates during the second half of 2010.

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