Bank of Canada governor Stephen Poloz's pending rate announcement probably won't have much effect on Canadians' mortgages, economists say.
Poloz on Wednesday will announce the central bank's decision on Canada's overnight rate, setting the interest rate at which big banks borrow and lend. Many predict it will be cut by 0.25 per cent, from its current level of 0.5 per cent.
Changes to the overnight rate have traditionally had major implications for Canadian mortgages. But times have changed and the central bank's power to influence the housing market has dwindled, economists say.
"It is our belief that the only way a decrease in the overnight rate will help Canadians is if the major Canadian banks decide to pass on the entire rate discount to Canadian borrowers," Marcus Tzaferis, a mortgage broker with MorCan Direct, wrote in an email to CBC News. "Unfortunately this can no longer be taken for granted."
Canada's big banks, including RBC, have all made modest increases to their mortgage rates in recent months. (Jeff McIntosh/Canadian Press)
It used to be that any change to the central bank's overnight rate would be followed lockstep by changes to the prime rate — the interest rate commercial banks charge their most credit-worthy customers. Canadians with variable-rate mortgages would then see that change reflected in their monthly payments.
But when the Bank of Canada slashed the overnight rate by 0.25 per cent a year ago, commercial banks only cut their prime rate by 0.15 per cent.
This time around, if Poloz announces a rate cut, the banks may not follow suit at all, said CIBC deputy chief economist Benjamin Tal.
"That's maybe something the [Bank of Canada] should look at, because the ability of the bank to really impact market rates and activity is very limited," he told CBC News.
John Andrew, a real-estate professor at Queen's University in Kingston, Ont., agrees.
"For some of the lenders, they might say, 'Look, we're at rock bottom already; we can't really reduce our mortgage rates anymore.' It'll be interesting to see. It will, at the very least, keep them from creeping up any further.'"
Topsy-turvy mortgage landscape
Mortgage rates have, indeed, been creeping up — a fact that may have many homeowners scratching their heads.
Usually a turbulent economy, like the one Canada is currently facing, with oil below $30 US a barrel and the loonie lower than 70 cents US, would be accompanied by a drop in mortgage costs, especially fixed rates. That's because fixed mortgages are tied directly to government bond yields, which are at an all-time low as risk-wary investors steer clear of the stock market.
Still, all the major banks have announced mortgage-rate increases since December.
CIBC increased its three-year fixed rate by 10 basis points to 2.59 per cent. RBC upped its special offer on a five-year fixed mortgage by one-tenth of a point to 3.04 per cent. TD Bank increased its one-year and four-year closed special rates by one-tenth of a point each. Scotiabank increased its variable rate by 10 basis points.
Mortgage rates probably won't be dramatically changed by the Bank of Canada's benchmark overnight rate, economists say. (Sean Kilpatrick/Canadian Press)
In order to understand Canadian mortgage rates, you have to look at the global picture, Tal said.
"Given the uncertainty and given the fact that risk profiles are rising globally, I think that the Canadian banks have to pay more to fund themselves," he said.
Robert McLister, a mortgage planner at intelliMortgage and the founder of RateSpy.com, told Canadian Press the hikes stem partly from new government regulations designed to reduce risk in the country's housing industry, including plans to force the banks to have more money set aside in case the mortgage loans on their books go bad.
"It's going to be more expensive for banks to hold mortgages," McLister said. "They have to put aside more capital and when you put aside more capital, then you can't do other things with it. And that costs you money, so that gets baked into pricing."
Don't panic — rates are steady
Still, Andrew said there's no reason for homeowners and would-be homeowners to fret over what he called modest hikes to already low rates.
"I think the rise we've seen in mortgage rates isn't really very significant," he said.
And they're not expected to skyrocket any time soon. Tal expects rates to remain "relatively stable" for at least the next year or two. "I just don't see anything that will send them up," he said.
But he added the pendulum will eventually swing back, so it's best to plan ahead.
"If you're buying right now, it's very, very likely that five years from now, when you renew, rates will be notably higher," he said. "If you cannot finance your mortgage at rates that are one to two per cent higher, then you have to think twice about the type of house that you want to buy."
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