How Coronavirus is Impacting Your Mortgage

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Last updated on May 19, 2021 Comments: 4

What started out as a few cases of pneumonia at the tail end of 2019 in Wuhan, China, has quickly spread worldwide, officially becoming a pandemic in March 2020. Of course, I’m talking about COVID-19, commonly known as Coronavirus. Since then, over two million people have died and almost 95 million people have been infected worldwide.

Coronavirus isn’t just a health issue, it’s also a financial issue. COVID-19 has caused millions of Canadians to lose their jobs and thousands of businesses to go under. In addition to affecting the stock market, travel, consumer prices and investments, it’s also affecting the mortgage rates in Canada.

Fixed vs. Variable Mortgages

There is a lot to know about mortgages however, there are two main types of mortgage rates: fixed and variable. With fixed mortgage rates as its name suggests your mortgage rate and mortgage payment are fixed or remain the same for the duration of your mortgage term. This is different from the other type, variable rate. With variable mortgage rates, your mortgage rate and mortgage payment have the potential to change at any point during your mortgage term.

As these rates are dependent on Government of Canada Bond Yields and the Bank of Canada, the Coronavirus is definitely affecting your mortgage rates.

What’s Going on with Government of Canada Bond Yields?

There is a direct relationship between Government of Canada bond yields and fixed mortgage rates. When Government of Canada bond yields fall, so do fixed mortgage rates and vice-versa.

When pricing fixed mortgage rates, lenders do it based on Government of Canada bond yields of similar length. For example, the rates on five-year fixed-rate mortgages are based on the rates of five-year Government of Canada bond yields.

Government of Canada bond yields have been hovering near a record low ever since March 2020 when bond yields plummeted due to the worsening Coronavirus situation.

There was a brief time early in 2020 when fixed mortgage rates rose sharply. This was due to liquidity concerns in the market. Liquidity refers to how easily and cheaply mortgage lenders can borrow money. Lenders were concerned with the lack of liquidity in the market.

To help put the minds of lenders at ease, the Bank of Canada introduced the Canada Mortgage Bond Purchase Program. Ever since March 2020, the Bank of Canada started aggressively buying mortgage bonds from lenders. This seems to have calmed lenders’ minds. Mortgage rates steadily decreased throughout 2020, reaching record lows. The low mortgage rates we’re seeing right now are even lower than during the financial crisis over a decade ago. You can now get a five-year fixed-rate mortgage below two percent, something unheard of prior to the pandemic.

The Bank of Canada stopped its bond-buying program in late October 2020. There were fears that fixed mortgage rates would increase, but those fears don’t seem to have come to fruition. Although fixed mortgage rates are no longer falling like before, we’ve seen slight decreases with lenders over the last few months, as Canadians continue to enjoy record low fixed mortgage rates.

Although I don’t expect fixed mortgage rates to go up anytime soon, it’s very possible that fixed mortgage rates could start to trend upwards at some point in 2021. It mainly depends on how well the COVID-19 vaccine rollout goes and how quickly the economy recovers. If the vaccine rollout goes well and the economy bounces back quicker than anticipated, we could very well see fixed mortgage rates start to go up in the coming months. The chances of fixed mortgage rates going up in 2021 are 50/50 at this point.

What Should I Do?

If I was a homeowner with an existing fixed-rate mortgage, I would phone up my mortgage broker and see if it makes sense to break my mortgage and lock in at a lower rate. Although mortgage penalties tend to be higher when fixed mortgage rates drop, the interest savings from a lower mortgage rate may more than offset the penalty of breaking your mortgage. Likewise, if you have high-interest debt, you might consider refinancing your mortgage and locking it in at a low rate. Paying less than three percent on credit card debt by rolling it into your mortgage is a lot better than 19 percent or more.

If you’re a homebuyer, now is an excellent time to go with a fixed-rate mortgage. With fixed mortgage rates at or near historic lows, you can lock in at an ultra-low rate and know exactly what your mortgage payment and rate will be for the years to come.

With the Government of Canada’s bond yield rates and fixed mortgage rates at or near record lows, you could be paying much less on your mortgage if you refinance.

What About the Overnight Lending Rate?

 

What sets variable mortgage rates apart from fixed mortgage rates is that variable mortgage rates are priced based on interest rates set by the Bank of Canada. Referred to as the overnight lending rate, when you hear that the Bank of Canada has changed interest rates, the media is referring to the overnight lending rate, the interest rate the banks use to lend to one another.

The Bank of Canada had a plan. It wanted to steadily increase interest rates back to pre-financial crisis levels. Unfortunately, due to Coronavirus, those plans have been thrown out the window. In recent months the Bank of Canada hit the pause button on its plan to raise interest rates due in large part to lackluster economic growth.

Canada’s central bank aggressively cut interest rates at the start of the COVID-19 pandemic. It cut interest rates three times in March 2020. The Bank of Canada cut interest rates once on its scheduled interest rate announcement date on March 4th and again on March 16th and March 27th in emergency rate cuts, matching similar rate cuts made by the U.S. Federal Reserve.

Ever since March 2020 interest rates have remained steady. Our central bank hasn’t cut interest rates for almost 10 months at the time I’m writing this article. It’s not hard to see why. Canadians have generally adjusted to the new COVID-19 economy. The COVID-19 vaccine rollout has started with the most vulnerable Canadians, including healthcare workers and those living in long-term care facilities.

There isn’t much more room for the Bank of Canada to cut interest rates.  With interest rates currently sitting at 0.25 percent, if the Bank of Canada were to cut rates by just 0.25 percent, which is the typical interest rate cut, we could be at zero percent interest rates. Although some European countries have gone there, I don’t think that’s a place the Bank of Canada wants to go, unless the COVID-19 pandemic takes a turn for the worse.

That being said, markets are betting that there could be a “micro rate cut” among tightening COVID-19 in most parts of the country. Although the Bank of Canada usually cuts interest rates by a minimum 0.25 percent, it hasn’t taken the option off the table of cutting rates by less than 0.25 percent. The Bank of England and the Reserve Bank of Australia both cut their interest rates by 0.15 percent to 0.1 percent in 2020, so who’s to say the Bank of Canada can’t cut rates by 0.1 percent or 0.15 percent?

Canada got a new Bank Governor in 2020. Stephen Poloz stepped aside for his successor Tiff Macklem. Although Macklem says negative interest rates are out of the question, he has yet to pour cold water on the idea of a micro rate cut.

When the Bank of Canada cut interest rates three times in March 2020, lenders matched the rate cut each time. That puts the prime rate currently at 2.45 percent at most lenders. If you’re someone who signed up for a variable rate mortgage prior to the rate cuts, you could be benefiting from a variable mortgage rate well below two percent.

Something else that influences the pricing on variable rate mortgages is something called the Bankers’ Acceptance. The Bankers’ Acceptance generally determines the funding cost of lenders on variable rate mortgages.

In recent months the spread between the prime rate and the Bankers’ Acceptance has been widening. So much so that the spread is the widest we’ve seen in over a decade. This means that there’s room for lenders to offer more of a discount off variable-rate mortgages in the coming months if this persists.

What Should I Do?

If my mortgage was coming up for renewal and I was struggling with the decision to go with a fixed or variable rate mortgage, I would probably lean towards a fixed rate. That’s because you can lock into a five-year fixed-rate mortgage when mortgage rates are near a record low. I don’t really see fixed mortgage rates getting much lower. There’s not much more room for fixed mortgage rates to fall. Fixed mortgage rates make a lot of sense for first-time homebuyers looking for the stability of knowing what their mortgage payment and rate will be for the next five years.

That being said, there’s an argument for going variable as well. If there’s a chance you might break your mortgage, you might opt for a variable mortgage. There are many reasons you might break your mortgage – a job promotion, moving to another city, or refinancing your mortgage, to name a few. If you sign up for a fixed-rate mortgage with one of the big banks, your mortgage penalty can end up being quite hefty. However, if you sign up for a variable rate mortgage, your mortgage penalty will only ever be three months of interest. You don’t have to worry about being hit with a big penalty like you would with one of the big banks.

Another reason you might go with a variable rate mortgage is that it doesn’t look like interest rates are going to be going up anytime soon. Bank of Canada Governor Tiff Macklem has clearly stated that interest rates will remain low for the foreseeable future until the economy recovers. Although things can always change, it doesn’t look like interest rates will go up until 2023 or 2024 at the earliest.

And that’s just when the Bank of Canada wants to increase rates. The Bank of Canada wanted to increase rates for years after the financial crisis but kept delaying it because something would always happen with the economy that made the timing not quite right.

If you sign up for a variable rate mortgage, you could benefit from a lower rate, and even a possible micro rate cut, for at least two or three years before interest rates start to go up. When rates do start to go up, it should be in a slow and methodical way. It’s very unlikely the Bank of Canada will put interest rates up as quickly as it slashed them as that would cause the economy to go into a recession again.

If you do go with a variable rate mortgage, be sure to budget for the possibility of higher mortgage rates in the future. With most variable rate mortgages, your mortgage payment goes up when the rate goes up. It’s best to plan ahead, so you’re not surprised later on.

The Impact Falling Mortgage Rates have on the Mortgage Stress Test

It’s also become easier to qualify for mortgages over the past several months. The big banks have been cutting their posted mortgage rates used in determining the mortgage stress test benchmark rate.

The benchmark rate has fallen three times since the pandemic started. At the start of the pandemic, it sat at 5.34 percent. Today it sits at 4.79 percent, with the last drop in the benchmark rate coming in August 2020. The most recent cut in August 2020 boosts the average home buyer’s home purchasing power by 1.5 percent compared to the last rate cut.

I wouldn’t expect the benchmark rate to change any further unless the big banks decide to cut their posted mortgage rates.

Plans to recalculate the way the stress test is calculated are still on the back burner, although we could see them introduced at some point in 2021 once the COVID-19 pandemic gets better.

How Falling Mortgage Rates Will Affect the Spring Real Estate Market

You might want to prepare for a robust spring market.

ImageSource: Shutterstock

The spring real estate market last year was unlike anything we have ever seen before. It started out strong in early March until COVID-19 took the wind out of its sails. A lot of home buyers and sellers decided to sit on the sidelines, waiting for the COVID-19 situation to play out.

Once things got more back to normal, things really picked up in the latter part of the spring market in May and June. The real estate market is largely to credit with this. Realtors went out of their way to ensure home buyers felt safe looking at homes and home sellers felt safe listing their home and having strangers inside their homes.

The jury is still out on the spring real estate market of 2021. With the entire province of Ontario under stay-at-home orders, it has the potential to put a real damper on real estate. Meanwhile, in the province of British Columbia where COVID-19 cases are comparatively more under control, we could very well see a much stronger spring real estate market then.

It largely comes down to whether Canadians are comfortable buying and selling during COVID times. Just the term “stay-at-home” might scare many Ontarians away from buying or selling homes during the spring if these stay-at-home orders are still in effect.

Final Word

I’m sure nobody in Canada wished that the pandemic happened. Thousands of Canadians have lost their lives due to COVID-19. Although one of the few positive things to come out of it is record-low mortgage rates.

If mortgage rates stay at a record low heading into the spring market, we can expect a decent spring real estate market. But that’s not a given. Canadians may be starting to get used to low mortgage rates. If COVID-19 cases continue to rise, some Canadians may choose to wait to buy or sell a home until they’ve been vaccinated, which could lead to the spring real estate market being a bit of a dud.

In terms of what I’d like to see happen, I’m glad that a COVID-19 vaccine is finally here. I’d like for Canada to speed up the pace with which Canadians are vaccinating. The speed of the vaccine rollout so far leaves a lot of room for improvement. I’d also like to see Canadians continue to follow the rules, such as “social distancing” and proper handwashing (for at least 20 seconds) to help fight the spread of the disease.

This is a frightening situation, but a good reminder about how important it is to have an emergency fund. Nobody could have predicted Coronavirus would get so bad so quickly. However, by having an emergency fund, you can at least cover expenses like your mortgage if you ever have to take unpaid time off work due to sickness.

Go to Our COVID-19 Help Center.

FAQ

If you have an accepted offer on a home and you’ve waived all conditions, losing your job before your home closes can put your mortgage financing in jeopardy. If the mortgage lender has already signed off on your income it could be okay. However, some lenders will review your income again one last time before closing to make sure nothing has changed. If the lender finds out you have lost your job, you might be forced to go with alternative financing at higher rates and with fees.
If you’re someone who’s self-employed and your business was impacted by COVID-19 in 2020, it could impact your ability to qualify for a mortgage in 2021. Mortgage lenders like to look at a two year average of your income and your average income could be lower if your business was impacted by the pandemic. Alternative lenders may be willing to look at your self-employment income in a more flexible way, but be prepared to pay a higher mortgage rate.
One of the biggest factors that influence home sales activity is interest rates. The lower interest rates, the more it encourages home sale activity. Likewise, higher interest rates tend to discourage home sales.
If you’re thinking of buying a home in 2021, it’s a good idea to get pre-approved for a mortgage. You can get pre-approved for a mortgage with a mortgage broker. When you’re pre-approved for a mortgage, you’ll know exactly how much you can afford to spend on a property. That way you won’t waste your time looking at homes outside of your price range. You can also budget ahead of time for the mortgage payments and property taxes, so you don’t end up buying a home with carrying costs that you can’t afford.
Yes, you could. That’s because the big banks calculate their fixed-rate mortgage penalties based on their inflated posted rate. Consider signing up for a variable rate mortgage or a fixed-rate mortgage with a fairer penalty lender.

Author Bio

Sean Cooper
Sean Cooper bought his first house when he was just 27 and paid off his mortgage in only three years. An in-demand personal finance journalist, money coach and speaker, his articles have been featured in publications such as the Toronto Star, Globe and Mail, MoneySense and Tangerine’s Forward Thinking blog. He makes regular appearances on national radio and television shows to discuss personal finance, real estate and mortgages, and is also the bestselling author of the book, Burn Your Mortgage. Follow him on Twitter @BurnYrMortgage and request his services on his website.

Article comments

4 comments
Beth says:

I live in BC and the penalty for breaking a fixed rate mortgage is a 3 month penalty with all big banks

Aaron Broverman says:

Hi Beth,
Thanks for the info. I’m sure the BC residents who don’t know do appreciate it. I am originally from BC and now live in Ontario, so even for me it’s good to know how things work, even if I no longer live in the province.

Tommy Yu says:

The every point you have made in your article entitled “How Coronavirus is Impacting Your Mortgage” is so justified, clear, and informative. It is very helpful. Thank you so much, Sir.

Aaron Broverman says:

Thanks Tommy, we really try to do our best here at Greedyrates and always appreciate when our readers find what we do useful and informative. Thank you so much, we live to serve all our readers.