Interest rates are changing!
These last two weeks have seen many changes in the financial markets and mortgage world.
At the end of the week the Bank of Canada dropped its’ key lending rate by .5%. This is on top of the .5% drop they had announced on March 4th. The current key lending rate is now .75%. Most lenders had dropped their prime lending rates to take into account the March 4th drop and we will have to wait and see if Fridays’ drop is also passed on to consumers.
These drops are good news for anyone in a variable rate mortgage or with lines of credit that are based off of bank prime rates.
The five year bond rates have also been in decline and dropped from 1.36% in mid-February to .55% on March 11th . With these types of yields in the bond market it indicated that we could see rates for five year fixed term mortgages in the 2% to 2.5% range and in fact some lenders have been offering insured and insurable mortgages in this range.
This also changed on Friday of this week when the yields in the five year government of Canada bonds jumped to .67% and some lenders also indicated that they would be increasing the rates on their five year fixed term mortgages.
The other thing that happened on Friday was that the yield curve started to steepen. By that I mean that the yield on the two year bond was at .54%, the five year at .67% and the ten year stood at .85%. This is the type of yield curve that is considered more normal as investors want to be compensated with higher returns for taking on the additional risk of investing for a longer term. A steepening yield curve typically indicates that investors expect rising inflation and stronger economic growth.
This is in contrast to most of the last year where the yield curve was either flat or for a short time inverted. A flat yield curve can indicated that there is an anticipation of slower economic growth and an inverted yield curve can indicate that the economy may be headed towards a recession.
Now, one day does not make a trend but it is something to watch going forward and seems to be in direct conflict with the current challenges to the economy from the covid-19 virus and the oil price wars.
The impact to the economy from the covid-19 virus and the oil price wars will be a challenge and depending on how long they last will determine if the shook will be the same, better or worse than the 2008 financial crisis, Hopefully we will be able to get the covid-19 virus under control sooner as opposed to later so that the impact will be short term.
I we look at what happened in 2008 we saw the banks look for a bigger return and they switched from offering variable rates at prime minus a discount to prime plus a premium. In some case that swing was from prime minus 1% to prime plus 1%. At the same time they did push up rates on the fixed term mortgages.
So if you have a mortgage coming up or renewal in the next four months it might be a good idea to look at what your options are for locking in an interest rate.
If you have any questions please give me a call at 604-961-2400.