Interest Rates Are Falling, Why Aren’t Mortgage Rates?

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Interest Rates Are Falling, Why Aren’t Mortgage Rates?

It has been a difficult month for Canadians all across the country. Many have been stuck in their homes for weeks, struggling to come to terms with the new and temporary normal. The COVID-19 pandemic has left a devastating impact on the personal and financial lives of many Canadians.

In an attempt to dampen the impacts of the pandemic on the economy, the Bank of Canada cut its benchmark interest rate to 0.25 percent. This was done to make it easier and cheaper for people to borrow, spend and invest.

While bank prime lending rates, which usually follow in lockstep with the Bank of Canada’s benchmark interest rate, have fallen, mortgage rates have not followed suit. In fact, in some cases, they have actually gone up.

Why are mortgage rates not going down during this difficult time? 

It ultimately comes down to two things: Bank lending spread and uncertainty.

Essentially, when someone borrows money from the bank, the bank does not just pull that money out of its safe and hand it over to the borrower. Instead, the bank charges borrowers an interest rate to make a profit on the money it lends out.

The money the bank lends out is in fact borrowed itself. In order for the bank to earn a profit, the bank needs to ensure that the interest rate it charges its borrowers is higher than the cost it is paying to borrow that money. The bank lending spread is the profit margin that banks earn when they lend out money.

Generally, in less uncertain times, mortgage rates would drop in line with the bank’s prime lending rate or be discounted below the prime rate.

However, these are uncertain times, and there is a lot of fear and volatility in the market. Since the effects of the COVID-19 pandemic are difficult to forecast, banks have to prepare for everything. While it was relatively easy to find mortgage rates almost a full percentage point below a bank’s prime lending rate a month ago, that is not the case today.

Since defaults may be higher in the future, banks have had to make sure their lending spread has a bit of a risk premium built into it. This is not to say that mortgage rates have skyrocketed, because they have not. But it does explain why rates have not dropped or, in some cases, gone up by half a percentage point.

When there are signs that the COVID-19 pandemic is ending and the economic impact of the situation is more clear, expect to see mortgage rates fall again. At the end of the day, it is this temporary uncertainty that is keeping mortgage rates frozen or even increasing.

If you have questions about current mortgage rates, please reach out to us. Our knowledgeable mortgage brokers here at Clover Mortgage will be happy to provide you with answers to your questions and help you with any of your mortgage needs. Call or text us today at 416-674-6222 or toll free at 1-800-673-2230, or email us at info@clovermortgage.ca to speak with a licenced and experienced mortgage broker.