Interest rates have no where to go but up, right?
Maybe, but maybe not. Bank of Canada governor Mark Carney signalled last Tuesday that he’s still looking to raise the cost of borrowing “over time,” however, it appears to be an empty threat. The overnight rate has remained unchanged for months as Canadian home hunters continue to take advantage of a stable 1 percent borrowing rate.
In fact, some lenders are even considering dropping their mortgage rates below the current record lows. Rob McLister, editor of Canadian Mortgage Trends was quoted in the Financial Post insisting there is “no question rates [could] go potentially lower.”
While the prime rate tracks the overnight lending rate, it doesn’t limit how low banks can actually go with their mortgage products. Many mortgage brokers are also willing to cut their commission in order to buy down rates as they compete against larger lending source. If you’re currently on the market for a great rate, consider this: there are plenty of fix-year, fixed-rate closed mortgages available at 2.99 percent.
Are the Banks Still Profitting?
Discounting is the easiest way for lenders to entice buyers back to the table; not surprisingly that’s exactly what many lenders are currently doing in order to battle a cooling market. Even so, many lenders are still looking to enjoy relatively healthy margins. Those five-year contracts mentioned above track the Government of Canada five-year bond, which yields about 1.4 percent. That leaves a spread of 160 basis points, which is far from puny. What’s more, McLister firmly believes that bond yields could keep dropping, citing a host of “industrial countries with five-year yields under one percent.”
Declining Housing Levels
The combination of rising household debt and declining housing activity continues to plague the nation’s real estate industry. What’s more, it’s obvious that Canadian consumers are maxed out. In the second quarter of this year, the best-to-income ratio rose to a 163.4 percent from 161.8 percent in the previous quarter.
Not surprisingly, housing sales across the country are now dropping as more and more Canadians are simply unable to afford sky-high price.
While many developers are blaming recently implemented mortgage rules (Toronto builders complained that these new requirements are dragging down sales – the city’s sales were down 23 percent over the first nine months of 2012), it’s more likely that Canadians simply cannot continue to pile on more debt.
A new survey from the Bank of Montreal has found that one-third of homeowners polled say they’ve already cut back their spending, while one-quarter have reduced their savings and/or cut into their savings in order to make their mortgage payments. What’s more, 72 percent admit that they would feel a significant strain if interest rates were to increase by even a modest amont. Close to 16 percent said a 10 percent rise in mortgage payments would leave them at risk of not being able to afford their current home.
This information, which was part of BMO’s inaugural Housing Confidence Report, while frightening, isn’t anything new. Governor Carney has been warning of the risks associated with irresponsible borrowing for months now, insisting that a housing crash is imminent if interest rates were to increase.
Still, homeowners seem relatively confident in the market. Close to 46 percent of respondents to the BMO survey sy they are still planning to buy a home in the next five years.