Mortgage Rates Are Falling, But This May Not Affect Prices

Largely because of the Novel Coronavirus and the resultant ‘flight to safety’ among investors, Government of Canada bond prices are being bid up, and this means that the corresponding interest rates are falling (bond prices and interest rates move in opposite directions). The major banks’ fixed mortgage rates are tied to these bond rates, and so they are falling too. However, these lower rates don’t automatically mean that homebuyers will be able to qualify for larger mortgages. Here’s why.

The federal government introduced new lending rules two years ago. These rules require that all mortgage lenders qualify based upon either the government of Canada’s ‘benchmark’ rate or the actual mortgage rate plus 2%, whichever is higher. This means that lower mortgage rates will not change lenders’ ability to qualify unless the government’s benchmark rate is also reduced.

Recently TD Canada Trust reduced it’s posted 5 year rate from 5.43% to 4.99%, in line with the reductions in it’s ‘actual’ fixed mortgage rates, and this could lead other major banks to follow suit. If all the major banks lower their posted rates, this could induce the government to reduce it’s benchmark rate by a similar amount. Then, and only then, will homebuyers be able to qualify for larger mortgage loans.

The GTA real estate market has been heating up steadily over the past few months without any change in the benchmark rate, and so it is quite possible that the government will decide to leave the benchmark rate where it is to avoid adding fuel to the fire and potentially causing or facilitating another 2017-like price bubble. It’s also possible that bond prices will retreat once the coronavirus crisis has passed, and the government may want to avoid “yo-yoing”  their benchmark rate. For both of these reasons, I’m not expecting a quick reduction in the mortgage qualification rate. It’s even possible that the government rate could be increased if they feel this is needed to cool down the market.