It's no secret. The new global health threat called COVID-19 has dampened the global economy and is forcing policy makers to lower their interest rates. Just today, the US Central Bank cut its overnight rate by an unprecedented half a percent. And tomorrow, the Bank of Canada will meet to discuss its overnight lending rate and whether or not rate cuts are warranted.
As the Financial Post reported today, it's likely the Bank of Canada WILL cut its rate given the need to stimulate the economy, however, by how much is still anyone's guess. BOC tends to be conservative and would likely require more time to sort through the situation before making any major changes. Any cut to the overnight lending rate will influence variable rate credit facilities so if the rate goes down, expect to see a lower variable rate mortgage.
Are major rate cuts good for the economy? Ultimately, no. When interest rates are low, it entices consumers to borrow more because the cost is cheaper. Although this seems like a good idea, it can pose a problem when interest rates suddenly rise as borrowers can experience "payment shock" and default on their loans. Major insolvencies can then put a heavy strain on the banking system which is also one of the reasons a recession can occur.
So, what's actually happening right now with mortgage rates?
Mortgage interest rates are dropping as investors flee to the bond market. We say "flee" because the bond market is the safest place during extreme volatility and uncertainty. It's considered a "safe haven" because it has considerably less risk in comparison to the stock market. As a result, bond yields decrease, which pushes mortgage rates down.
Again, no one will argue that this is wonderful for prudent mortgage borrowers because they will capitalize on lower interest rates, pay down their mortgages faster and save more money, however, low rates also create much more competition and could bring back the bidding wars which artificially increased property values.
Mortgage rates are plummeting day by day, with new mortgage specials here, there and everywhere. Therefore, borrowers should use this time wisely and prioritize their finances which can include refinancing their current mortgage at a lower rate to, let's say, consolidate debt for example, purchasing their first home or making sure they lock in a great rate on their mortgage renewal. Mortgage interest rates can be held for up 120 days or 4 months, which gives borrowers ample time to take advantage of an unprecedented rate environment.
And we mustn't forget, that even before the global health threat came to be, real estate was already showing signs of improvement in Toronto and Vancouver.
Do you have mortgage questions?
Don't hesitate to call or write.
Sarah A. Colucci
Mortgage Agent, Lic. M14000929
Mortgage Edge, Mortgage Broker 10680
Direct: (647) 773-4849
By: Sarah Colucci