Why Are Some Mortgage Rates Rising?
Fears over the COVID-19 pandemic and plummeting oil prices have caused mortgage rates to plummet to multi-year lows over the past couple of weeks. But now some lenders are actually starting to raise rates. Fixed rates on certain terms have been creeping back up, while some of the big banks have been quietly cutting their discounts on prime rate (which affects floating rates).
Scotiabank, for example, raised its published 5-year closed variable rate 60 percentage points on Saturday, from 3.45% to 4.05%.
A host of other lenders have also been slashing their discounts from prime by anywhere from 20 up to 75 basis points. At one lender, for example, a new borrower could have obtained a high-ratio 5-year variable mortgage at Prime – 1.00%, or 2.45%. Today, that same rate is now Prime – 0.25%, or 3.20%.
So, what’s going on? Fear has saturated the market to the extent that lenders are now concerned about liquidity and rising defaults, according to observers.“I think if you’re a bank, you’re scared of losses right now,” Shawn Stillman, founder of mortgageoutlet.ca, told CMT. “The banks are in this to make money, and if they don’t think that they’re going to be able to make money because all of a sudden their default rate is going to go up, then they’re going to protect themselves by raising rates.”
In addition to the potential for an increase in default rates, Stillman says that with more people facing temporary layoffs due to the coronavirus, more people will start drawing on their available credit. “If you’re a business and you have a line of credit, you’re drawing on that line of credit. If you have credit cards, you’re maxing out those credit cards. You are using your ability to borrow more money and it becomes a shock to the system,” Stillman said. Essentially the banks could face a growing run on available credit facilities, which could challenge their ability to finance all of that credit.
That’s one of the reasons why the Office of the Superintendent of Financial Institutions (OSFI) announced on Friday that it was lowering the capital requirements for banks, which would free up an additional $300 billion of lending capacity. Despite the Bank of Canada’s emergency rate cut on Friday, markets are still pricing in an additional 50-bps cut when the Bank meets next month. That will bring Canada’s overnight lending rate down to 0.25%.
Knowing this, banks are starting to increase the discounts from prime so that the economics of funding variable-rate mortgages continues to make sense. “We’ve seen these shock-and-awe rate moves before,” wrote Rob McLister, founder of RateSpy.com. “On October 6, 2008, in the midst of the credit crisis, TD shocked the market with a massive 100-bps rate increase to prime + 1.00%. It applied to new variable and HELOC customers. TD rates were below prime just days before.”
Advice for Mortgage Shoppers
For those in the market for a new mortgage, and who are leaning towards a variable rate, experts recommend obtaining a rate hold as soon as possible. “I would say act sooner rather than later. Basically, this is not a time to think,” said Stillman. “Lock it in now and if something changes your mind, you can change your mind. But there’s a good chance it’s not going to be available (in a matter of days).”
McLister advises the same, whether you’re shopping for a fixed rate or a variable.
“Fixed rates aren’t rising like variable rates, not yet,” he noted. “But there’s a risk they could. Get a rate guarantee soon if you need a fixed mortgage in the next four months.”