Homeowners may have to wait longer for mortgage rates to fall: advisers - InfoNews

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Homeowners may have to wait longer for mortgage rates to fall: advisers

January 22, 2015 - 2:04 PM

TORONTO - Homebuyers hoping for another pullback in already-low mortgage rates are likely feeling some disappointment.

While a surprise decision by the Bank of Canada to cut its usually trend-setting rate to 0.75 per cent has made it cheaper for commercial banks to borrow money, so far the savings haven't been passed to consumers.

Financial experts say borrowers shouldn't expect the country's biggest banks to slash prime rates in lockstep with the central bank decision. Even if cuts do materialize, the discounts will likely fall short of the full quarter-point pullback.

"The banks will charge whatever the market will bear, unless there's a change in demand," said Colin Cieszynski, chief market strategist at CMC Markets in Toronto.

"If people still accept the mortgage rates banks are offering now ... then it's a win for the banks."

When the central bank announced its rate cut on Wednesday, the widespread expectation was that lenders would cut prime rates to 2.75 per cent from three per cent.

Those hopes were quickly crushed when several of the country's biggest banks showed they weren't ready to budge.

TD Bank (TSX:TD) decided to hold its prime rate steady, at least for now, while both Royal Bank (TSX:RY) and Scotiabank (TSX:BNS) said they would consider their options but weren't making any immediate decisions.

Canada's financial institutions aren't required to move in lockstep with the Bank of Canada rate, which sometimes means they won't if they want to pocket a bigger profit margin.

Lower interest rates charged to borrowers can negatively affect the banks' lending divisions, which make up a significant chunk of profits.

But if one major bank sees the opportunity to lure borrowers away from competitors it may latch onto a lower prime rate, which would almost certainly trigger others to follow suit.

"If you saw one do it, then you may see the whole group" make similar moves, Cieszynski said.

Several factors are at play when the banking industry considers how it lends to consumers.

Variable-rate mortgages are largely influenced by each commercial bank's prime rate, which finds its direction from the Bank of Canada's rate decisions. However, the mortgage rate isn't a direct reflection of the central bank's decisions.

Banks traditionally keep their prime rates within 25 to 50 basis points of the central bank.

The most recent exception was in December 2008 when the major banks reacted to the Bank of Canada's rate cut of 0.75 of a percentage point by funnelling only part of that amount down to consumers — lowering their prime rate by 0.5 of a point.

Borrowers may face a comparable scenario this time around, said Thomas Davidoff, an associate professor at the Sauder School of Business in British Columbia.

"Rates will fall, but it's not going to happen instantaneously," he said. "It takes time, and it's not going to be one-for-one."

Consumers can expect more immediate benefits on interest from their car loans, while lower interest rates will likely inspire some borrowers to take out bigger loans, said Sebastion Patrizio, an adviser at Mortgage Intelligence.

But he warned that Canadians shouldn't get carried away by short-term opportunities.

Household debt has already grown at a faster rate than disposable income, according to figures released by Statistics Canada for the third quarter.

Overall credit market debt load, which includes mortgages, other loans and consumer credit, soared to 162.6 per cent of disposable income in the period. The record-level debt means that Canadians owed about $1.63 for every dollar of disposable income.

"Rates will eventually start to go up, and consumers have to realize it could happen quickly," Patrizio said.

"You could be caught in a jump in your interest rate that may not be feasible for you."

He suggested that homeowners consider locking in their mortgage at a fixed five-year rate.

"Even if the short-term rates may be more attractive, eventually they will start to go up," he said.

"You don't want to miss out on these historic lows."

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The Canadian Press

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