26 Oct

Bank of Canada Will Stop Buying Canada Mortgage Bonds

Latest News

Posted by: Alisa Aragon

This Wednesday, the Bank of Canada will release its interest rate announcement and the October Monetary Policy Report. Most people expect the overnight rate to remain at 0.25%, where it has been since the pandemic hit. A few have suggested that the Bank could take a page from Australia and reduce overnight rates by 15 basis points. I don’t think so.

Canada’s economy is not as similar to Australia’s as you might think. Yes, both countries speak mostly English, are commodity exporters, and have a currency called the dollar. But that is where the similarities end. Australia is largely a supplier to China and East Asia, while the US dominates Canada’s exports. And our major resource is oil rather than metals. Most importantly, the Bank of Canada believes that lower rates would not be helpful, given the squeeze they put on the banking system’s workings.

The Bank has committed to staying at 0.25% until economic conditions would be consistent with a sustained 2% inflation rate. With the second wave of COVID cases and rolling shutdowns upon us, the economic rebound will slow in the coming quarters. Moreover, it is unlikely we will see inflation averaging above 2% or higher through 2022. The base case forecast for overnight rates by the Bank of Canada will remain at 0.25% until 2023 unless we see a miraculous end to the pandemic far sooner than most experts predict.

Where the Bank will make policy changes is in quantitative easing–the buying of financial assets to improve liquidity in financial markets. The Bank’s Governing Council has, for months, hinted at the need for the current structure of the QE program to be “calibrated.” While there have been few details on what this means, we interpret it to imply a move away from a QE program supporting ‘market-functioning’ to one that attempts to achieve a ‘monetary policy objective.’ To some degree, this has already started.

On October 15, the Bank announced it would retire the Repo purchase program, the Bankers’ Acceptance purchase Facility and the Canadian Mortgage Bond Purchase Program (CMBP). These areas of the Canadian fixed income market are fully functioning at present, and the Bank likely felt ongoing support was no longer necessary. The end of the CMBP got the attention of some mortgage market participants who argued it spelled the end of declining mortgage rates. I think this is a misinterpretation of the Bank’s actions.

As the chart below shows, the use of the CMBP has waned considerably since its introduction in March. It just isn’t needed any longer to assure liquidity in the CMB market. Since August, lenders have only been using about $70 to $190 million per week of the BoC’s $500 million capacity. The last time lenders fully utilized, it was in April when the emergency program was clearly needed. Ending this program should have little impact on mortgage rates.
“As overall financial market conditions continue to improve in Canada, usage in several of the Bank of Canada’s programs that support the functioning of key financial markets has declined significantly,” the Bank said in announcing the changes. The program, designed to provide much-needed liquidity to the banking system to keep credit flowing during the worst of the crisis, has “fallen into disuse as the stresses from the pandemic eased, and markets became much more self-sufficient.”

The move follows the bank’s decision a month ago to reduce its purchases of federal government treasury bills and similar short-term provincial money market debt, citing improvements in the health of short-term funding markets.

The CMB purchase program is also dwarfed by the Bank’s Government Bond Purchase Program (GBPP), as the chart below shows. “The central bank has pledged repeatedly that it will maintain the highest-profile of its emergency asset-buying programs – its minimum $5-billion-a-week purchases of Government of Canada bonds – until the [economic] recovery is well underway. It has also so far maintained its two programs to purchase provincial and corporate bonds, even though both programs’ demand has been far below original expectations.
Mortgage rates in Canada have an 85% correlation with the 5-year Government of Canada bond yield, which has fallen sharply over the course of the pandemic crisis.

Bottom Line

Of the three programs being wound down in the bank’s latest announcement, the biggest is the expanded term repo program, under which the central bank has purchased more than $200-billion of the short-term bank financing instruments since mid-March. The program hasn’t generated any purchases since mid-September.

The Bankers’ Acceptance Purchase Facility, involving short-term credit instruments typically used in international trade financing, was used heavily when introduced in March. Still, it hasn’t been tapped at all since late April. The central bank made about $47-billion in purchases under the program. However, all of those purchased assets have since reached maturity, meaning the central bank is no longer holding any bankers’ acceptances on its balance sheet.

The Canada Mortgage Bond Purchase Program predates the pandemic, but the Bank of Canada ramped up its purchases dramatically during the crisis. Since mid-March, it has accumulated about $8-billion of the bonds under its emergency measures through twice-weekly purchases directly from Canada Mortgage and Housing Corp. The size of the bank’s typical purchases in the past couple of months has been less than a quarter of what it was routinely buying in the spring.

These changes in the QE program will have little impact on interest rates and mortgage markets.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

2 Oct

Mortgage rates are at an all time low – here’s what you need to know

General

Posted by: Alisa Aragon

By Alisa Aragon

While COVID-19 has had a huge impact on the Canadian economy in the first half of this year, after businesses started reopening, the housing market began picking up. Many home buyers resumed their home searches, and homeowners looking at upsizing to a larger home started listing their homes for sale. With interest rates at historical lows, this is a good time for buyers to get into the market.

The Bank of Canada reviews its benchmark rate about eight times a year, depending on the state of the economy. However, the Bank of Canada made two unscheduled announcements reducing the overnight rate from 1.75 per cent at the beginning of March to 0.75 per cent, with another cut to 0.25 per cent. This was done to cushion the effects of the COVID-19 crisis on the economy in an effort to support the credit and financial system. This is the sharpest decline in the economy since the global economic crisis of 2008/2009 when the overnight rate was last at 0.25 per cent.

The new governor of the Bank of Canada, Tiff Macklem was “unusually clear” that interest rates will remain low for a long time. There are no plans to raise rates until capacity is absorbed, and inflation fits its two per cent target on a sustainable basis, which they estimate will take at least two years.

In addition, the qualifying interest rate was reduced from 4.94 per cent to 4.79 per cent which, to borrowers, means an increase in their borrowing power. To put this into perspective, in 2008, fixed rates were 5.99 per cent. This is much higher than the current qualifying rate of 4.79 per cent.

When you are purchasing a home with less than 20 per cent down payment, the mortgage will be an insured mortgage (also known as a high-ratio mortgage). The mortgage must be backed by Canada Mortgage Housing Corporation (CMHC), Genworth or Canada Guaranty. This insurance premium (also know as mortgage default insurance) is a one-time amount added to your final mortgage balance. This insurance protects the mortgage lender in case there is a loss in principal balance due to a mortgage foreclosure. Both the lender and the insurer need to approve the application. The maximum home price allowed is $999,999 and the maximum amortization is 25 years.

All insured mortgages need to qualify at the qualifying rate of 4.79 per cent. Once you find the right home, a Mortgage Expert will help you find the best mortgage with the best rate and terms. The rate that will be presented to you will be the “contract rate” which is what your mortgage payments will be based on.

All uninsured mortgages you must qualify using at the higher of two rates: the contract rate plus 2 per cent or the qualifying rate of 4.79 per cent. The application only needs to be approved by the mortgage lender and these mortgages can have up to a 30-year amortization.

As you start looking for a new home, and you get a mortgage remember that it is not about the maximum amount you qualify for, but what are you comfortable paying on a monthly basis.

As a Mortgage Expert, I can help you find the best mortgage with the best rate and terms based on your individual needs.


Article seen in New Home + Condo Guide:
https://issuu.com/wall2wall/docs/nexthome-new-home-and-condo-guide-v_0868291345c4a6/24

Photo Credit: Getty Images/iStockphoto