Mortgage rates, which last week were headed downward, reversed course this last week and headed upward.
It’s due to costs and application volumes, says Mark Herman from Mortgage Alliance in Calgary.
“Actually, all lenders have increased rates as their costs are up. All the lenders are working from home, which delays process time by about 20 percent and most lenders have five times the amount of regular deals sitting on their desks due to the super low rates,” says Herman. “Two weeks ago, five-year fixed mortgages were at 2.34 percent and 2.44 percent at most. Now all banks are up, it just varies on how much they have gone up depending on the lender. Five-year fixed, insured, are now ranging from 2.54 percent to 2.94 percent.”
The biggest changes are rates given on variable, or adjustable-rate mortgages (ARMs), says Herman.
“It was prime-minus-one-percent at most banks for five-year, high-ratio insured products and now most are hovering around prime. Yes, that is prime minus zero percent, as in, no discount at all,” he says. “This only affects new deals. Those who took out variables/ARMs before this do get the one percent lower rates due to the Bank of Canada rate cut.”
However … ”The variables are being cut or withdrawn all together due to the fact that banks have no idea what their cost of funds is going to be on these variable-type mortgages,” says Herman, adding the rate increases are due to lenders’ concerns about liquidity and a heightened credit risk.
Herman also spoke about the Big Six Banks’ six-month mortgage deferral programs.
“It is hard to comment on the deferred payment issue since it is a powder keg with every lender being different and too many variables to guess at for each of them,” he says. “What we know in general is keep paying your mortgage if you can. Most banks have said they will defer for up to six months but all those funds are tacked onto the end of the mortgages. So there is no free ride here. The interest added onto the end of the mortgage is also charged compound interest so you will be paying for it, for sure.
“Deferring and adding the payments to the end of the mortgage does mess with the original amortization and can make changing lenders later very difficult.”
Applying for a deferral is sometimes a quick and easy process and other times not, depending on the lender, says Herman.
“We have heard that some of the Big-Six lenders are asking for a full application and credit check again to apply for a deferral. For mortgages done via brokers, the owner should contact their lender directly via phone or email and ask for a deferral,” he says. “We have heard the response ranges from no questions asked (other than how long you want to defer for) to the banks putting you on a list to get back to later.”
A precedent of what perhaps to expect has been set.
“We do know what happened because of the fires in Fort McMurray,” says Herman. “The deferred interest and payments were added to the end of the mortgage. When the exiting five-year mortgage terms ended, a few customers were offered renewals at very high rates. To switch to a better rate at a different lender, the homeowner had to pay all of the deferred amount as a cash sum to get the amortization back in line. We don’t expect many homeowners to be able to do this right now and only a handful were able to pay that lump sum at the end of their term to switch lenders.”
To calm the liquidity and credit risk concerns of the banks and other lenders, the Bank of Canada (The Bank) is providing mortgage lenders with a $50 billion boost so they can maintain operations.
“Credit markets may become impaired,” said The Bank in a statement. “This is both because financial institutions face difficulties in obtaining funding for their lending, as well as because they may become reluctant to lend in fear that many borrowers may be unable to pay. The problem of funding is partly system-wide and partly specific to individual institutions. In the context of market turmoil, there is a generalized desire for safer assets, but even if that demand is satisfied in aggregate, some financial institutions may have difficulty obtaining funding.
“Our interventions have thus far included ready access to funding by lengthening the term over which we lend money to banks, widening the collateral we accept to provide lending and expanding the list of eligible institutions that can access our lending. Widening accepted collateral enables institutions holding that collateral to obtain financing so they can continue other lending and it supports the functioning of markets for those assets accepted as collateral.
“We are also prepared to help viable financial institutions who face challenges in these choppy markets. We have established a new Standing Term Liquidity Facility (STLF) to help banks better manage their liquidity risks and continue to provide their customers with access to credit. The Bank of Canada encourages the use of the STLF by banks to help them continue to provide loans to households and businesses when they need it most.
“The Bank will take the necessary measures to ensure credit continues to flow.”