Month: March 2020

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General Beata Wojtalik 27 Mar



Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

Strains in the commercial paper and government securities markets triggered today’s action to engage in quantitative easing. The Governing Council has been meeting every day during the pandemic crisis. Market illiquidity is a significant problem and one the Bank considers foundational. These large-scale purchases of financial assets are intended to improve the functioning of financial markets.

Credit risk spreads have widened sharply in recent days. People are moving to cash. Liquidity has dried up in all financial markets, even government-guaranteed markets such as Canadian Mortgage-Backed securities (CMBs) and GoC bills and bonds. The commercial paper market–used by businesses for short-term financing–has become nonfunctional. The Bank is making large-scale purchases of financial assets in illiquid markets to improve market functioning across the yield curve. They are not attempting to change the shape of the curve for now but might do so in the future.

These large-scale purchases will create the liquidity that the financial system is demanding so that financial intermediation can function. Risk has risen, which creates the need for more significant cash injections.

At the press conference today, Senior Deputy Governor Wilkins refrained from speculating what other measures the Bank might take in the future. When asked, “Where is the bottom?” She responded, “That depends on the resolution of the Covid-19 health issues.”

The Bank will discuss the economic outlook in its Monetary Policy Report at their regularly scheduled meeting on April 15. In response to questions, Governor Poloz said it is challenging to assess what the impact of the shutdown of the economy will be. A negative cycle of pessimism is clearly in place. The Bank’s rate cuts help to reduce monthly payments on floating rate debt. He is hoping to maintain consumer confidence and expectations of a return to normalcy.

The oil price cut alone would have been sufficient reason for the Bank of Canada to lower interest rates. The Covid-19 medical emergency and the shutdown dramatically exacerbates the situation. All that monetary policy can do is to cushion the blow and avoid structural problems to the economy. The overnight rate of 0.25% is consistent with market rates along the yield curve.

High household debt levels have historically been a concern. Monetary policy easing helps to bridge the gap until the health concerns are resolved. The housing market, according to Wilkins, is no longer a concern for excessive borrowing by cash-strapped households.

At this point, the Bank is not contemplating negative interest rates. Monetary policy has little further room to maneuver, given interest rates are already very low. With businesses closed, lower interest rates do not encourage consumers to go out and spend money.

Large-scale debt purchases by the Bank will continue for an extended period to provide liquidity. The Bank can do this in virtually unlimited quantities as needed. The policymakers are also focussing on the period after the crisis. They want the economy to have an excellent foundation for growth when the economy resumes its normal functioning.

Fiscal stimulus is crucial at this time. The newly introduced income support for people who are not covered by the Employment Insurance system is a particularly important safety net for the economy. There are many other elements of the fiscal stimulus, and the government stands ready to do more as needed.

The Canadian dollar has moved down on the Bank’s latest emergency action. The loonie has also been battered by the dramatic decline in oil prices. Canada is getting a double whammy from the pandemic and the oil price war between Saudi Arabia and Russia. The loonie’s decline feeds through to rising prices of imports. However, the pandemic has disrupted trade and imports have fallen.

The Bank of Canada suggested as well that they are meeting twice a week with the leadership of the Big-Six Banks. The cost of funds for the banks has risen sharply. CMHC is buying large volumes of mortgages from the banks, which, along with CMB purchases by the central bank, will shore up liquidity. The banks are well-capitalized and robust. The level of collaboration between the Bank of Canada and the Big Six is very high.


As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago. These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.



General Beata Wojtalik 6 Mar


Steady February Job Market Ahead of Virus Scare

Job growth in Canada remained robust last month with net employment gains of 30,300 – all of which were in private-sector full-time jobs. The unemployment rate rose a tick to 5.6%, but that is still down from a year ago and around multi-decade lows. The positive news was wage growth remained strong at an annual rate of 4.1%, well above the rate of inflation.

But these data sets are a rear-view mirror snapshot of economic activity. They will matter little for financial markets fixated on the growing impact of the Coronavirus that sparked dramatic rates cuts by both the Federal Reserve and the Bank of Canada this week.

That the labour market held up in February is not a surprise. Earlier reports on consumer and business confidence were surprisingly resilient in the past month despite disruptions from rail blockades and Coronavirus concerns abroad. The Ontario teachers’ strike, however, did result in reduced hours worked for the educational services sector.

British Columbia and Ontario posted the most significant job losses last month; they also saw the unemployment rate rise notably as more people searched for work. Quebec posted job gains of 20,000 continuing a trend of substantial growth in employment in the province for several months, and the Quebec unemployment rate fell to 4.5%, the lowest since at least 1976. For the first time in recent memory, Quebec has the lowest unemployment rate in Canada (see table below), surpassing BC for that honour.

In February, most of the disruptions from the Coronavirus were concentrated in China. Imports from that region to Canada were reportedly down in January in numbers released separately this morning, but mainly due to fewer finished goods (cell phones) rather than a significant drop in the supply of industrial inputs.

The US jobs report for February was also released this morning, showing considerable strength. Employment surged, and the jobless rate declined to match a half-century low of 3.5%. The data did little to alter a flight to safety in financial markets, as investors remained focused on the potential economic fallout from the virus. The yield on the 10-year Treasury was down 20 basis points to 0.74% while the S&P 500 fell 2.6%, bringing the monthly decline to -11.6% as of this writing. The US Treasury 5-year yield is only 0.56%.

Canadian financial markets have been similarly impacted, with the government of Canada 5-year yield trading this morning at .65%, down from 1.69% at the start of this year (see chart below). The graph shows the government bond market in a free fall. The TSX has dropped -8.32% over the past month. Oil prices are down sharply, falling -16.7% over the same period. Gold prices are up sharply, reflecting its safe-haven status.

Bottom Line: The markets currently are predicting overnight interest rates will continue to fall as the Fed and the Bank of Canada react aggressively. Another cut by the BoC is priced in at its April 15th meeting. The Fed is expected to cut again at its regularly scheduled meeting on March 18th.

At times like these, there is no predicting how far this will go or for how long. The best advice is to avoid panic selling. From a housing market perspective, lower interest rates make housing more affordable. Governor Poloz, following a speech in Toronto yesterday, said that restoring confidence is crucial. He defended the Bank’s 50 bp rate cut–its most aggressive move in more than a decade–from criticism that it will fuel excessive household debt accumulation. He argued that the rate cut would improve cash flow for those with flexible rate mortgages and will boost confidence. He believes the virus could slow housing demand and suggests that the Bank’s actions will forestall a damaging slowdown in the housing market.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market,” he said. “In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

He might well be right about that, as none of us know just how close to pandemic we might be. In any event, the monetary easing provides a buffer for the economy.


BoC’s Poloz Says Rate Cuts Will Stabilize Housing, Not Lead to “Froth”

General Beata Wojtalik 6 Mar

BoC’s Poloz Says Rate Cuts Will Stabilize Housing, Not Lead to “Froth”

Bank of Canada Governor Stephen Poloz attempted to ease concerns yesterday that lower interest rates will further stoke overheated housing markets.

Poloz argued this week’s rate cut was needed to combat the risks posed by the current global health crisis, adding that the easing will in fact help stabilize housing markets.

“Not surprisingly, the threat to the global economy of COVID-19—the coronavirus—played a central role in our deliberations, and we are coordinating actively with other G7 central banks and fiscal authorities,” he said in a prepared speech on Thursday.

Bank of Canada Governor Stephen Poloz
Bank of Canada Governor Stephen Poloz

The 50-bps rate cut was in stark contrast to the cautious “wait-and-see” approach that the Bank had previously adopted as it held rates steady while dozens of central banks around the world were cutting rates to head off growing economic headwinds. This week’s rate move also flew in the face of Poloz’s own fears about further stoking heated housing markets.

Just two months ago, Poloz told BNN Bloomberg: “Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth…It can be very unhealthy when the situation becomes speculative.”

But extraordinary times call for extraordinary measures.

“…Risk management demands a prompt and sizable policy response to larger shocks to ensure that the economy remains well anchored. Governing Council agreed that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities,” he told a Toronto audience.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

Capital Economics’ senior economist Stephen Brown hinted at this in a research note published last week.

“While [the Bank of Canada] has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”

That seems to be Poloz’s thinking. Even if people are losing confidence (and money) as a result of rising coronavirus infections and plummeting stock markets, they can at least be reassured that the value of their home is continuing to rise (so long as you’re not a first-time buyer looking to enter the market).

“Further, we expect that the B-20 mortgage lending guidelines will continue to improve the quality of the stock of mortgage debt,” Poloz added.

Remember, these are the same lending guidelines (for uninsured borrowers) that OSFI is proposing to loosen as early as this spring, pending a review of public consultation.

More Cuts Are on the Way

While Poloz is defending the Bank’s larger-than-expected rate cut this week, the easing is still far from done, at least as far as the markets are concerned.

Canada’s 5-year bond yield continued to fall on Thursday, coming within 0.36 percentage points of its all-time low. The continued panic over the growing fallout of COVID-19 has markets pricing in up to 75 bps of rate cuts by October, with the next cut coming as early as April.

By the time all is said and done, this week’s 50-bps rate cut may look like just a warm-up.

Steve Huebl

Canada’s Prime Rate Falls to 3.45% Following BoC Rate Cut

General Beata Wojtalik 6 Mar

Canada’s Prime Rate Falls to 3.45% Following BoC Rate Cut

Canada’s prime rate fell to 3.45% today for the first time since July 2018.

This is good news for floating-rate mortgage holders and those with Home Equity Lines of Credit or regular lines of credit. And it’s all thanks to Canada’s big banks passing along the full 50-bps rate cut delivered by the Bank of Canada yesterday.

Many were expecting the banks to keep some of those savings for themselves to shore up their own balance sheets, but RBC Royal Bank led the way yesterday evening by announcing the full 50-bps reduction to its prime rate. The rest of the country’s big banks quickly followed suit, save for National Bank of Canada (as of this posting).

Another exception is TD Bank’s mortgage prime rate, which remains 15 bps higher at 3.60%, as opposed to its regular prime rate of 3.45% that applies to Home Equity Lines of Credit.

All of this followed the Bank of Canada’s decision to drop its overnight target rate by 0.50% to 1.25% on Wednesdaywhere it hadn’t been since October 2018due to fears of a deepening economic downturn caused by the coronavirus, a.k.a., Covid-19.

“…The COVID-19 virus is a material negative shock to the Canadian and global outlooks,” the Bank said in its statement, adding that additional policy easing isn’t out of the question.

“…the outlook is clearly weaker now than it was in January,” it added. “As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Additional Easing Expected in April

Bank of Canada Governor Stephen Poloz

Many observers and the markets at large expect the Bank of Canada to deliver another 25-bps rate cut next month, and potentially another quarter-point cut before the end of the year, which would bring Canada’s overnight rate to 0.75%.

“The growing risk of COVID-19 to the outlook suggests that the Bank of Canada will follow today’s 50-bp cut in interest rates with an additional 25-bps cut in April,” noted Stephen Brown of Capital Economics. “Given the Governing Council’s lingering concerns that looser policy will boost an already red-hot housing market, however, we think the Bank is unlikely to go further than that.”

Brian DePratto, Senior Economist at TD Economics, added the Bank’s move was “an important message…that the relevant authorities are ready and willing to act to support economic activity in the face of negative shocks.”

“And, as much as lower rates will further fan the flames of housing markets, the key five-year interest rate is in large part beyond the Bank of Canada’s control, reflecting global factors such as the Federal Reserve’s shock 50-basis-point cut [Tuesday] (and market expectations of further cuts south of the border),” he added.

What it Means for Mortgage Rates?

Yesterday’s BoC rate cut and subsequent fall in the prime rate will affect those with floating rates. But those looking for fixed mortgage rates will also see rates continue to decline due to the dramatic fall in Canadian bond yields over the past several months.

Bond yields, which lead fixed mortgage rates, have fallen from 1.69% since January of this year to under 0.90% today. Average fixed rates have subsequently fallen from a high of 2.50% in December 2018 to 2.44% currently, and we’re continuing to see lenders lower rates each passing week.

But the big winners yesterday were floating-rate mortgage holders, who will see their mortgage rates fall half-a-percent. That will result in interest cost savings of about $500 a year per $100,000 of mortgage, according to

Those with adjustable-rate mortgages will see their payments drop by about $24 per $100,000 of mortgage, while those with variable-rate mortgages will continue to make the same monthly payment but see their portion going towards principal increase while the interest portion decreases.

More Fuel for Home Prices

crea home price report november 2019Coincidentally, on the same day of the BoC’s interest rate announcement, the Toronto Real Estate Board announced that the average home price in the Greater Toronto Area rose nearly 17% year-over-year in February to $910,290 (or $989,218 in the City of Toronto).

Home sales, meanwhile, were up nearly 46%.

Many have speculated that interest rate easing from the Bank of Canada would be added fuel for the country’s hottest housing markets, further driving up prices.

Not only that, but the Department of Finance announced recently it will be introducing a new qualifying rate for the insured mortgage stress test (those with less than 20% down payment) starting April 6.

That will make it easier for more buyers to qualify for larger mortgages (or qualify, period). That, in turn, will add to demand, which is already being driven by a lack of supply as well as buyers’ fear of missing out (FOMO) in certain hot markets.

“People are not concerned about coronavirus, people are not concerned about recession,” John Pasalis, president of Toronto property brokerage Realosophy Realty, told Bloomberg News. “The only things they’re worried about is buying a homeand if they don’t buy now they might spend more in the future.”

Steve Huebl


General Beata Wojtalik 6 Mar


The Bank of Canada Brings Out The Big Guns

Following yesterday’s surprise emergency 50 basis point (bp) rate cut by the Fed, the Bank of Canada followed suit today and signalled it is poised to do more if necessary. The BoC lowered its target for the overnight rate by 50 bps to 1.25%, suggesting that “the COVID-19 virus is a material negative shock to the Canadian and global outlooks.” This is the first time the Bank has eased monetary policy in four years.

According to the BoC’s press release, “COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply, and supply chains have been disrupted. This has pulled down commodity prices, and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.” The press release went on to promise that “as the situation evolves, the Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Moving the full 50 basis points is a powerful message from the Bank of Canada. Particularly given that Governor Poloz has long been bucking the tide of monetary easing by more than 30 central banks around the world, concerned about adding fuel to a red hot housing market, especially in Toronto. Other central banks will no doubt follow, although already-negative interest rates hamper the euro-area and Japan.

Canadian interest rates, which have been falling rapidly since mid-February, nosedived in response to the Bank’s announcement. The 5-year Government of Canada bond yield plunged to a mere 0.82% (see chart below), about half its level at the start of the year.

Fixed-rate mortgage rates have fallen as well, although not as much as government bond yields. The prime rate, which has been stuck at 3.95% since October 2018 when the Bank of Canada last changed (hiked) its overnight rate, is going to fall, but not by the full 50 bps as the cost of funds for banks has risen with the surge in credit spreads. A cut in the prime rate will lower variable-rate mortgage rates.

Many expect the Fed to cut rates again when it meets later this month at its regularly scheduled policy meeting, and the Canadian central bank is now expected to cut interest rates again in April. Of course, monetary easing does not address supply-chain disruptions or travel cancellations. Easing is meant to flood the system with liquidity and improve consumer and business confidence–just as happened in response to the financial crisis. Expect fiscal stimulus as well in the upcoming federal budget.

All of this will boost housing demand even though reduced travel from China might crimp sales in Vancouver. A potential recession is not good for housing, but lower interest rates certainly fuel what was already a hot spring sales market. Data released today by the Toronto Real Estate Board show that Toronto home prices soared in February, and sales jumped despite low inventories. The number of transactions jumped 46% from February 2019, which was a 10-year sales low as the market struggled with tougher mortgage rules and higher interest rates. February sales were up by about 15% compared to January.



General Beata Wojtalik 6 Mar


The Fed Brings Out The Big Guns

In a remarkable show of force, the US Federal Reserve jumped the gun on its regularly scheduled meeting on March 18 and cut the target overnight fed funds rate by a full 50 basis points (bps) to 1%-to-1.25%. This now stands well below the Bank of Canada’s target rate of 1.75% and may well force the Bank’s hand to cut rates when it meets tomorrow, possibly even by 50 bps.

The Fed has not cut rates outside of its normal cycle of meetings since October 8, 2008, as the collapse of Lehman Brothers roiled financial markets. Such moves are rare, but not unprecedented.

The BoC is conflicted, in that such a dramatic rate cut would fuel household borrowing and the housing market, which the Bank considers to be robust enough.

The Federal Open Market Committee (FOMC, the Fed’s policymaking group) released the following statement: “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy.”

In an 11 AM (ET) news conference, Chairman Powell said the broader spread of the virus poses an evolving risk to the economy that required immediate action. The FOMC judged the risk to the economy had worsened. The Fed acted unilaterally, in contrast to the coordinated central bank move taken during the financial crisis in 2008.

However, the Fed is in active discussion with other central banks around the world, and the European Central Bank indicated earlier today that they would take any necessary actions. Central banks in the euro-area and Japan have less scope to follow with rates already in negative territory.

Governor Carney said earlier today that the Bank of England would take steps needed to battle the virus shock. Carney hinted at the complexity of dealing with the trauma for central banks in assessing whether the impact falls on demand — which they have more capacity to address — or supply — which is harder to for central banks to treat.

G-7 finance chiefs and central bankers are scheduled to have a rare conference call today.

With election tensions running strong in the US–after all, today is Super Tuesday–it’s easy to imagine that this move by the Fed is as much political as economic. It comes amid public pressure for a rate cut by President Trump. Moreover, following today’s dramatic move, the president called for more, demanding in a tweet that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA.” 

Politicizing the Fed is dangerous and reduces the global credibility of the US central bank.

Stock markets around the world reversed some of today’s earlier losses on the news. The US stock markets opened today with a significant selloff following a rally yesterday. Bond yields continued to decline on the news.

Bottom Line for Canada: The key government of Canada 5-year bond yield has fallen sharply today to 0.925% and falling at the time of this writing. The 5-year yield was 1.04% before the Fed’s announcement. The Bank of Canada will likely cut overnight rates tomorrow for the first time since October 2018–but by how much? I would guess by 25 bps given Poloz’s concern about household debt.


BoC Increasingly Likely to Deliver a Surprise Rate Cut This Week

General Beata Wojtalik 6 Mar

BoC Increasingly Likely to Deliver a Surprise Rate Cut This Week

Growing fallout from the coronavirusincluding tanking stock markets and falling oil pricesmeans the Bank of Canada is increasingly likely to cut interest rates this week.

Just days ago, the market consensus was that the Bank of Canada would wait until its April meeting before lowering rates by 25 bps, in order to give the Governing Council more time to assess the situation.

But panic selling on the world’s stock markets, as well as a 25%+ drop in the price in WTI crude oil since the start of the year, means markets are nearly fully expecting the Bank of Canada to move its rate cut to its upcoming meeting this Wednesday.

Not only that, but markets are suddenly pricing in three quarter-point rate cuts by the end of the year.

crashing marketsEconomists at RBC Economics are among those anticipating a rate cut this week.

“The plunge in global equity markets and sharp drop in commodity prices, in particular oil, are bumping up the risks that the confidence hit in financial markets will be mirrored in household and business sentiment,” said RBC’s Deputy Chief Economist, Dawn Desjardins. “The data doesn’t show this yet but with markets extrapolating what looked like a modest hit to global growth from the coronavirus into a full-fledged economic downturn, the bank is likely to want to lean against any deterioration in confidence.”

She added that the bank’s revised call for a rate cut does not remove the possibility for an additional rate cut in April.

“The Bank of Canada doesn’t want to further stoke this fire [household debt-to-income ratios reaching new highs] via rate cuts that could encourage home-buying behaviour,” added economists at TD Economics, who also expect a rate cut this week. “But the unfortunate truth is that it probably can’t do much to manage this market.”

Stephen Brown, Chief Economist at Capital Economics, added that increased confidence of price growth among homeowners may be welcomed by the BoC in this time of growing fear in equity markets.

“We think the Bank would only cut if it were convinced that the disruption caused by the virus elsewhere in the world has already been enough to seriously jeopardize domestic growth…The sharp downward moves in commodity prices are a bigger immediate risk, but volatile market moves may not be enough to persuade the Bank to cut either,” Brown wrote. “All that said, it clearly would not take much more to change the Bank’s mind. While it has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”

Derek Holt, head of capital markets at Scotiabank, urged the Bank to cut rates right away given the latest developments.

“The Bank of Canada needs to cut. Now. Enough dithering,” he wrote on Friday. “The greater risk to financial stability is not giving the economy a shot in the arm.”

Three Rate Cuts Suddenly Priced in for 2020

As quickly as coronavirus-induced fears have engulfed equity markets, so too have expectations changed for additional monetary policy easing this year.

Overnight Index Swap (OIS) markets as tracked by Bloomberg are now fully pricing in three 25-bps rate cuts by year’s end.

That would bring Canada’s overnight interest rate down to 1.00%, a level it hasn’t seen since December of 2017.

What This Means for Fixed and Variable Mortgage Rates?

Canadian 5-year bond yields have experienced a stunning collapse in recent weeks, falling from 1.66% as of January 1 of this year to a two-and-a-half-year low of 1.07% as of Friday.

Since bond yields lead fixed mortgage rates, we can expect mortgage lenders to continue lowering rates in the weeks ahead. As we reported last month, fixed rates have already been on the move lower, with the lowest nationally available insured 5-year fixed rate falling to 2.33%. Since then, they’ve already crept down to 2.32%, according to rate-tracking website That’s down from 3.19% a year ago.

Falling bond yields are good news for fixed-rate holders, who should expect rates to continue to trend lower in the weeks ahead if fears over coronavirus persist and economic data continues to soften.

As of Monday morning, HSBC announced new rate specials, including a high-ratio 3-year fixed rate of 1.99%.

But for the first time in a while, variable-rate mortgage holders may finally see some rate relief as well if the Bank of Canada follows through with its expected rate cuts.

Average variable rates currently stand at 2.82%, as tracked by RateSpy, compared to 2.59% for fixed-rate mortgages.

But rates may not fall completely in lock-step with BoC rate cuts, say some. Variable-rate mortgages are based instead on prime rate, which is set by the country’s big banks.

With the big banks’ revenue under pressure in this time of flat to inverted yield curves, rate expert Rob McLister of says not to expect them to lower prime rate to the same extent that the BoC lowers the overnight rate.

“Given this, and rising loan loss provisions and higher risk premiums, I would not bet on banks passing along a full BoC cut to borrowers. That said, hopefully I’m wrong and we’re all pleasantly surprised,” he told CMT.

But that’s not a reason for borrowers to avoid variable rates, he adds.

“If the BoC does cut and banks pocket 10 out of 25 bps, variables can still make sense for well-qualified borrowers,” he said. “For one thing, the BoC likely won’t stop at just one cut. Moreover, variables are still more flexible than longer-term fixed rates. Having the option to break early—for just a three-month interest charge—is a powerful option in any market, let alone a down-trending rate market.”

Have Questions About the New Stress Test Rate? Here Are Some Answers…

General Beata Wojtalik 6 Mar

Have Questions About the New Stress Test Rate? Here Are Some Answers…

The Department of Finance created shockwaves this week with its announcement that it will be revamping how insured mortgages are stress tested.

Now that the dust has settled, here’s a more in-depth look at the implications, as well as some industry reaction.

But first, a quick recap of what’s changing come April 6, 2020:

  • Current stress test rate for insured mortgages (typically those with less than 20% equity): 5.19%
    • Based on the Big 6 banks’ posted 5-year fixed rates.
  • New stress test rate (if it were in effect today): ~4.89%
    • Based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

Could the new benchmark rate eventually be higher than the current qualification rate?

According to estimates from Mortgage Professionals Canada’s chief economist Will Dunning, yes.

He plotted his estimate of the typical “special offer” rate advertised by major lenders, and as recently as late-2018, the new qualifying rate would have been nearly 40 basis points higher than the new qualifying rate. Dunning notes, however, that it would be beneficial to have official data provided directly from the Canada Mortgage and Housing Corporation (CMHC) to remove some of the guess work from estimating the official average insured mortgage rate.

“Given the history, it’s highly possible that there will be future times when the new qualifying rate will be higher than the posted rate, but I don’t see that as important: the posted rate should never have been part of the mortgage stress tests,” Dunning told CMT.

stress test chart comparison

How will the rate be calculated, exactly?

That’s still to be determined, at least publicly. The Bank of Canada says it can’t confirm if the new benchmark rate will be based on all insured applications (such as 2- to 4-unit properties, self-employed borrowers, second homes, rental properties, etc.) or just a core group.

How much of the mortgage market will be impacted by the stress test rate change?

As of 2018, insured mortgages accounted for less than a third of new mortgages. Although, the Office of the Superintendent of Financial Institutions (OSFI) announced it is also considering a similar change in its formula for stress testing uninsured mortgages (those with more than 20% equity). OSFI is currently accepting input from stakeholders by email until March 17, 2020.

How much does it help the average buyer?

There’s no question the new formula for stress testing insured mortgages will help many buyers who are currently just on the cusp of being able to pass the stress test.

Consider that the current stress test rate of 5.19% is a full 283 basis points higher than the lowest available insured mortgage rate on the market.

The new formula will narrow that gap by 30 basis points after April 6. This will decrease the income required to buy a $300,000 home by roughly $1,500, assuming a 5% down payment and 25-year amortization.

Alternatively, it will allow those who can easily pass the stress test to purchase about 5% more home. As Ron Butler of Butler Mortgage Inc. told us, “Someone who qualified for a $500K mortgage (previously) will qualify for $525K in April.”

Does the move go far enough to help buyers?

It depends on who you ask. Industry representatives say the changes are welcome, but that there’s still room for improvement to assist young and aspiring homeowners struggling to enter the housing market.

“A stress test at 4.89% is better than one at 5.19%, but this test threshold is still too high, for several reasons,” MPC’s Chief Economist Will Dunning told CMT.

“Most importantly, the tests fail to acknowledge that by the time of a renewal in five years, the borrower’s income will have increased, usually by more than 10%, and they will have more capacity to make payments. The calculations should, but don’t, take this into consideration.”

Dunning adds that after a five-year term of the borrower faithfully making payments, the outstanding principal will have been reduced by 14-15%. “The design of the test doesn’t properly account for this, and therefore it over-estimates how much the payments would increase. And, it increasingly looks unlikely that rates will rise by anywhere near the 2 percentage points that the revised test will assume.”

Paul Taylor, President and CEO, Mortgage Professionals Canada, told BNN Bloomberg that he’s not sure if the change will help qualify a “tremendous” number of additional buyers.

“It certainly will help some folks on the margin,” he said. “But it’s certainly good news for the marketplace from a policy perspective.”

Taylor added the association would like to see the test closer to 75 basis points above a buyer’s contract rate (as opposed to 200 bps) based on calculations that take into account income growth and mortgage principal payment over the term of the mortgage.

Responding to concerns of the change contributing to increased home prices, Taylor said this: “I think the lack of supply is really what is causing the increase in those prices. There are just far more people than there are housing products available for them. This particular change…is not really going to affect the prices in isolation. I think it’s the rest of the dynamics in the market that are going to create the increases that everybody is expecting.”

Industry Reaction to the Stress Test Change

Here’s a selection of other viewpoints from across the industry on the stress test rate change:

Jason Stephen, President of The Canadian Real Estate Association (CREA)

“REALTORS have advocated for changes to the stress test on behalf of potential homeowners who have been sidelined, borrowers who have moved away from the regulated market to less-regulated options, and real estate markets across the country in need of relief. We are pleased the government has taken steps to address some of these issues in Canadian housing markets.”

Evan Siddall, head of the Canada Mortgage and Housing Corporation (CMHC):

“It’s worth noting that by changing the reference rate, authorities are recommitting to the merits of the stress test. The credibility of the measure is strengthened via this technical improvement. Calls to reduce the margin (from 200 to 75 bps) do not have traction at present.”

Rob McLister, Founder of

“Will a looser stress test stoke the market? Absolutely. While it might boost buying power by just 3% or less (depending on what the new benchmark turns out to be, come April 6), the psychological boost will be material. Homebuyers—particularly younger buyers—are already worried about prices running away from them, given the double-digit gains of the last 12 months. News of an easier mortgage stress test won’t help.”

Doug Porter, Chief Economist, BMO Bank

Extending similar qualifying rate changes to uninsured mortgage stress testing could “put further upward pressure on prices, especially in markets that are already leaning to a sellers market.”

Bill Morneau, Minister of Finance (responsible for the latest qualifying rate change)

“We think these are positive moves to ensure that the approach remains effective for Canadians and that it also deals with changing market conditions…I think what’s important for us to ensure is that we continue to protect people’s most important investment. This will ensure that people only take on mortgages that are appropriate for their situation.”

Steve Huebl

Department of Finance Announces New Qualifying Rate for Insured Stress Test

General Beata Wojtalik 6 Mar

Department of Finance Announces New Qualifying Rate for Insured Stress Test

The federal government announced on Tuesday it will be changing the benchmark qualifying rate used for Canada’s insured mortgage stress test.

The change, which will take effect April 6, 2020, means borrowers with insured mortgages (typically those with less than 20% equity) will need to prove they can afford monthly mortgage payment based on a rate equal to the weekly median 5-year fixed insured mortgage rate plus 2%.

The Department of Finance confirmed that rate would currently equal 4.89%, 30 basis points less than today’s benchmark qualifying rate of 5.19%, which is based on the Big 6 banks’ posted 5-year fixed rates.

mortgage stress testCritics say the big banks have been keeping their 5-year fixed posted rates artificially high since they are used in setting prepayment penalties. But with mortgage rates falling since last year, the mortgage stress test has been increasingly out of sync with the actual contract rates consumers are securing.

“This adjustment to the stress test will allow it to be more representative of the mortgage rates offered by lenders and more responsive to market conditions,” the DoF said in its announcement.

The news comes following a review of the mortgage stress test that was ordered by Prime Minister Justin Trudeau in December to explore recommendations from financial institutions to make the stress test more “dynamic.”

Changes to the Uninsured Stress Test Rate Coming Too?

At the same time, the Office of the Superintendent of Financial Institutions (OSFI) delivered its own announcement that it is considering the same benchmark rate for its stress test on uninsured mortgages (those with more than 20% down payment).

“The proposed new benchmark for uninsured mortgages is based on rates from mortgage applications submitted by a wide variety of lenders, which makes it more representative of both the broader market and fluctuations in actual contract rates,” OSFI said in its release.

The move was preceded by hints from OSFI’s Assistant Superintendent, Ben Gully, who said in a recent speech recently that “the posted rate is not playing the role that we intended.” He added that the “difference between the average contract rate and the benchmark has been widening more recently, suggesting that the benchmark is less responsive to market changes than when it was first proposed.”

OSFI said it is currently accepting input from stakeholders by email until March 17, 2020.

Industry Reaction to the Stress Test Change

Mortgage Professionals Canada (MPC) has been calling for the stress test rates to be uncoupled from the Bank of Canada’s posted 5-year fixed rate since the insured stress test was introduced in 2016. The association welcomed the announcement, saying the use of a floating rate will make the stress test more dynamic and responsive to changing markets and bond rates.

“We thank the government for acknowledging this issue and making these changes,” Paul Taylor, President and CEO of MPC, wrote in an email to membership. “We do, however, still consider a two percent (2%) buffer to be an onerous test level given the economic realities globally”.

Taylor said the association will continue to ask for additional support measures for those still struggling to pass the stress test.

“Included in our asks will be the reintroduction of an insurable 30-year amortization for first-time buyers, and increases in the income maximum multipliers under the newly introduced First Time Home Buyers Incentive Plan,” he said.

stress test announcement reactionWhile industry reaction has so far been favourable, some said there were likely ulterior motives for the sudden change in policy.

“It’s a political move. The government said they would do ‘something’ about high-ratio buyers in the last election, so now they have,” Ron Butler of Butler Mortgage told CMT. “I suppose if the ‘average rate’ drops enough to produce a 4.39% qualifying rate, then we will see some real changes.”

As it stands, Butler estimates the 30-basis point drop in the qualifying rate will increase the purchasing power for insured borrowers by around 5%.

“Someone who qualified for a $500K mortgage yesterday will qualify for $525K in April,” he said.

Steve Huebl