The second quarter of 2020 will perhaps prove to be one of the most turbulent periods in Canadian economic history. The frightening spread of the COVID-19 pandemic and the subsequent shutdown of the economy has produced some truly startling economic data. As for Canadian mortgage rates, once-rising risk spreads have been quelled by swift and overwhelming action by the Bank of Canada to inject liquidity into the financial system. The Bank not only lowered its overnight lending rate to its effective lower bound of 25 basis points but also implemented a massive expansion of its balance sheet intended to prevent a rise in private sector borrowing costs. The Bank, along with the Canadian Mortgage and Housing Corporation (CMHC), purchased billions in mortgage-backed securities, helping to reverse rising mortgage rates early in the crisis. The average Canadian 5-year fixed-rate now sits at a record low of 2.49 percent. Given the economic outlook, it may be some time before we see much movement in mortgage rates.
Unfortunately, not all government policy has been as helpful. At the beginning of the pandemic, the government shelved its plan to modify the insured stress test rate, a change that would have likely been applied to the B-20 uninsured stress test as well. Instead of a rate based on the 5-year posted rate of the largest Canadian banks, the new stress test rate would have changed to the average 5-year fixed rate plus a 200-basis point buffer.
As of now, instead of 4.94 percent, the qualifying rate would be 4.49 percent, much more reflective of current market conditions.
Even more perplexing, CMHC decided to tighten mortgage credit in the middle of a historically deep recession, lowering the maximum gross and total debt service ratios, increasing minimum credit scores and banning some sources of non-traditional down payments for insured borrowers. Private sector mortgage insurers, thankfully, have decided not to follow suit, which should mute the overall impact of CMHC’s actions.
Source: Bank of Canada, BCREA, Rate Spy