Since April 2008, Vancouver mortgage rates have been on a steady decline. Financing Minister Jim Flaherty constantly reminds us that rates will go up soon, and then fixed rates drop shortly after. So what gives?
It’s important to remember the government’s role during a recession. Although there has been a lot of stimulus (especially in the US and Europe), there is caution of high inflation following any recovery. Government usually combats high inflation first by raising interest rates, which reduces borrowing and generally reduces growth. Flaherty’s obvious concern is that with low interest rates and Canada household debt on the rise, that if interest rates rise many Canadians will be unable to service their debt. So, they warn us that rates will go up… but they never do.
What has been really interesting is Flaherty diving right into the mortgage industry and requesting lenders increase their rates whenever a 5 year fixed rate drops below 2.99%. Who knows why 2.99% is acceptable, but 2.89% is not, but Flaherty does not want borrowers feeling “payment shock” when their mortgage comes up for renewal in 5 years and rates are inevitably higher (by the way, not only is 2.89% available through brokers but even 2.79% for certain circumstances). Flaherty has already warned banks not to enter a rate war, and made a “stern call” to Manulife to encourage them to go from 2.89% to 2.99%. Like the banks really need to be lining their pockets with fatter margins. The way I see it, they are privately run companies and pay big bucks to limit their risk.
So currently, there is both downward pressure on rates (due to falling/low bond yields) and upward pressure (Mr Flaherty) which should keep rates really tight to the 3% mark for medium term rates (5 years).
But how about variable rates? Discounts off prime went from Prime – .9% to Prime within a 6-8 week period in August – October 2011, immediately after the US debt was downgraded from AAA to AA. Variable rate discounts are priced primarily on what is happening with the LIBOR rate (London Inter-Bank Offered Rate…very similar to our overnight lending rate which our Prime rate is based off of) and the LIBOR has been dropping steadily since July 2012. This is why we have seen discounts off prime go from nothing (3% net rate) to Prime – .35% or .4% (net rate 2.6% – 2.65%). I expect the trend to continue, at least for the short term, which should see better variable discounting in the near future.
Final Thoughts: Expect fixed rates to stay around the 3% level for 3-6 months and for variable rate discounts to increase slightly to Prime – .5% or even Prime – .6% by the end of the year.
Our Vancouver Mortgage Broker, Kyle Green weighs in on the outlook for Vancouver Mortgage Rates. Kyle can be reached by his website, or at his office: +1 778 373 5441.