Mortgage & Housing Update

 

Housing markets continue to adjust to regulatory and government tightening as well as to higher mortgage rates. The speculative frenzy has cooled, and multiple bidding situations are no longer commonplace in Toronto and surrounding areas. Home prices in the detached single-family space will remain soft for some time, and residential markets are now balanced or favour buyers across the country. The hottest sector remains condos where buyers face limited supply.

Owing to the housing slowdown, a general slowing in the Canadian economy and significant trade uncertainty, the Bank of Canada will continue to be cautious. But as inflation trends higher, we expect the Bank to hike interest rates once again this summer and possibly in the fall as well.

Last week, the Bank of Canada increased the qualifying (posted five-year fixed) mortgage rate from 5.14% to 5.34% in response to benchmark mortgage rate increases at most of the chartered banks. TD bank led the rate hikes when it increased its posted rate for a five-year fixed mortgage by a whopping 47 basis points to 5.59% on April 25.

The central bank qualifying rate is separate from the actual mortgage rates offered by banks to borrowers but is used to assess homebuyers who are seeking loans. The higher rates come as an estimated 47% of all existing mortgages will need to be refinanced in 2018, up from the 25 to 35% range in a typical year, according to a recent CIBC Capital Markets report.

A rise in government bond yields preceded the slew of bank hikes. The yield on the Government of Canada benchmark five-year bond was 2.25% this morning, compared to 1.02% a year earlier. Fixed-rate mortgages tend to move with government bond yields of a similar term, reflecting the change in borrowing costs.

Competitive pressure among the banks appears to be heating up as BMO last week offered what is possibly the largest-ever discount on variable rate loans. The bank is promoting a variable five-year mortgage at 2.45%, a full percentage point below its own benchmark rate. This morning, TD Bank joined is rival in offering a highly discounted variable mortgage rate effective until the end of the month. Canada's lenders often provide special spring mortgage rates as homebuying activity picks up. These moves come amid slowing mortgage growth.

Borrowers still have to qualify based on the much higher Bank of Canada posted rate of 5.34%.

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