Mortgage rate cut, home sales increase
May 22, 2019
A cut in the seldom-used 10-year mortgage rate could signal wider mortgage rate relief this year as the full extent of Canada’s housing downturn becomes clear, some analysts contend.
Last week, HSBC trimmed its 10-year mortgage to 3.24 per cent. Two second-tier lenders, Butler Mortgage and intelliMortgage , cut 10-year rates to 3.2 per cent.
These are the lowest rates on record for 10-year term home loans, according to RateSpy.
While 10-year terms are often higher than five-year terms due to baked-in risk factors—and therefore unpopular—cuts on long-term rates are possible because of lower bond yields.
“There’s little difference between the five-year rate and the 10-year rate, in terms of the cost for us to borrow, and we can pass that on to the customer,” explained Barry Gollom, senior vice president at HSBC Canada. HSBC also reduced rates on seven-year rates.
In some cases, rates on 10-year mortgages are now only 0.3 percentage points more than on five-year mortgages, noted Sherry Cooper, chief economist at Dominion Lending Centres. She added that some homeowners may opt for longer term mortgages to protect themselves against a potential rate hike.
But locking in for 10-years is not a good strategy if mortgage rates decrease, as some analysts are forecasting.
Capital Economics predicts the Bank of Canada will cut interest rates twice this year, lowering the benchmark rate to 1.25 per cent, from 1.75 per cent, in two steps. Capital’s senior economist for Canada, Stephen Brown, said that once the full economic extent of the slowdown in housing starts becomes apparent, the Bank of Canada will be forced to reduce rates. Brown said the recent uptick in multiple housing starts reflects homes that were pre-sold 18 months ago—not a fresh round of new investment.
With current pre-sales lower, multiple-family starts will slow, Brown said, having a negative impact on employment and consumer spending that would then lead to interest rate cuts.
However, housing sales increased across Canada in April, inching up 3.6 per cent from March and were 4.2 per cent higher than a year earlier, according to the Canadian Real Estate Association. April sales were up in about 60 per cent of markets, with the condo-dominant Greater Toronto Area accounting for over half of the national gain.