Canada’s largest banks cut mortgage rates last week, and now they might need to reverse the cuts. Half of Canada’s “Big Six” banks cut the interest rate on their 5-year fixed rate mortgages at the end of last week. It might have seemed like a no-brainer back then, but a week is forever ago in this market. Now with global bond yields surging higher, they’re looking to reverse the cuts. Is there a command+Z for banking?
Canadian Banks Make Big Cut To 5-Year Fixed Mortgage Rates
Just last week half of Canada’s Big Six banks made sharp cuts to their uninsured 5-year fixed rate mortgages. TD Bank was the first to lower on Thursday, cutting the rate down to 1.99% — a drop of 45 basis points (bps). CIBC followed by lowering to 2.39% and RBC was third with a drop to 2.19% into the weekend. These would have been very sharp declines for a month, but they were made in just a day.
A lot of factors go into mortgage rates, but one of the biggest is bond yields for similar terms of debt. Mortgage rates often have a premium over government bonds of similar terms. In this case, the Government of Canada (GoC) 5-year bond has the biggest influence.
Since the Spring, the GoC 5-year bond yield has been falling. The delta variant concerns combined with elevated unemployment painted a bad picture. The thought was, the dampened outlook would cause central banks to pile on more stimulus. That abruptly changed this week.
Canada 5-Year Government Bond Sees Yields Surge Higher
The GoC 5-year bond yields have been surging higher over the past couple of days. This morning the yield reached 1.023%, an increase of just over 8 bps from last week. In just a few days it regained months of lost ground, and is back to the highest level since mid-March. Global central banks communicating the need for less stimulus, is the primary driver.
Government of Canada 5-Year Bond Yield
The percent yield of the Government of Canada’s 5-year bond.
Source: Bank of Canada; Better Dwelling.
Mortgage Rate Cuts Might Be Reversed As Early As Next Week
When the cost of funding debt is rising, it doesn’t make a whole lot of sense to start cutting interest costs. The cuts mentioned above were up to 45 bps, and the increase to the 5-year bond was nearly 20% of that. From that datapoint alone, we know the cuts would need at least a partial increase.
It’s a little more difficult to figure out when that reverse needs to happen. Fortunately, industry veteran Rob McLister found out it can be as early as next week.
Higher mortgage rates sound bad, but that’s the bubble mentality talking. Low bond yields are a sign of a weak economy that needs state intervention to operate. Rising rates are a sign of things improving, which is good news. They’re still low compared to pre-pandemic levels, but as things further improve they should climb higher.
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What were they thinking when they cut it is an interesting question? Did they foresee a double-dip recession, because their economists sure as heck seem to be downplaying negatives?
Might be the opposite. I noticed BMO is unchanged, and they’ve been saying rates are going to climb to more natural levels.
Econ at RBC, TD, and CIBC are of the mindset real estate only goes up, and lending will always be cheap forever. Stephen is 100% correct that higher rates are a sign of a better economy and/or inflation.
Anyone that says they see the need for future rates to fall and the economy is doing well is most certainly lying. Low rates are to heal.
Excess capital from the home sale slowdown possible? Crikey, they have no clue what’s happening in the rest of the world, do they?
That would mean the Bank of Canada is providing excess stimulus from its QE program, so I’d expect them to announce another taper in October, which would have raised rates anyway.
Question about the Australia article and “self-cures.” Would you have any statistics on what Canada’s self-curing looks like?
I don’t even know what a “self cure” is? Where can I find the Australia article? I hate how everything is so complicated. There’s no way previous generations needed to understand monetary policy when they were buying homes with jobs where a high school diploma was considered overeducated.
And I’m not complaining, I’m jealous. Things should be that easy today.
Im renewing a mortgage Monday, had said Id likely go with the 1.94% for 5 years, just phoned them and said I definitely want the 1.94 you offered and see you Monday…
Every one thinks it’s so hard to purchase a home these days? Well in late 50’s when a home cost $6-8000 it’s was very hard then not every one could afford one. In a lot of cases it’s called sacrifice many things back then and now.
What has changed is life style,cell phones,internet,all the must haves holidays,2 cars,dinners out, renting a condo etc
When you rent every dollar more you pay is a dollar less for a home. Look around see what a lot of renters drive
BMW,Benz,etc .
People on minimum wage back then and today find it very tough to buy something. You hear of couple earning $175.000. Per yr cannot afford a home,
Today it’s easier as mtg are very low.