Homeowners and new home buyers have been reaping the benefits of record-low mortgage interest rates in Canada, with current homeowners being able to lock-in lower rates while new home buyers have found mortgages to be more affordable. Mortgage refinances increased by 21% in the first quarter of 2020 compared to 2019. But why have rates dropped to such low levels?
Interest rate drops give opportunity to hopeful homeowners
A slumping economy amid the COVID-19 pandemic has caused the Bank of Canada to react by dropping their policy interest rate to just 0.25% during the spring of 2020, compared to a policy rate of 1.75% the year prior. This policy rate affects short-term interest rates, such as the prime rate, which banks use for things like variable-rate mortgages. The current policy rate of 0.25% is the same as the record-low rate of 0.25% seen in 2009 in response to the Great Recession.
The Bank of Canada also conducted quantitative easing in 2020, which is the process of purchasing government bonds and other financial assets to help stimulate the economy by directly injecting money into the market. The start of the pandemic induced fear in the market as investors fled to cash and banks were weary of lending out more money. The money injected by quantitative easing would be used, such as by financial institutions, to keep the flow of money in the economy moving.
Since then, the real estate market has shown great resilience, with soaring demand for single-family homes, buyers expanding the boundaries of where they search for homes beyond city limits, and investors looking at smart ways to invest in real estate and still turn a good profit.
The effects of quantitative easing
The Bank of Canada’s aggressive quantitative easing program has led to some significant effects. Massive purchasing of government bonds has led the Bank of Canada on-track to hold an estimated 40% of all Government of Canada bonds by 2021. This enormous purchasing pressure on longer-term bonds have caused bond prices to rise, and consequently for bond yields to fall.
Lower bond yields induces long-term interest rates to fall as well, such as mortgage rates. The intention is that lower interest rates will stimulate more borrowing, which will lead to more spending in the economy and a more buoyant housing market.
From March 2020 to December 2020, the Bank of Canada used its quantitative easing program to purchase more than $180 billion in Government of Canada bonds, and is still buying at a rate of at least $4 billion a week. Long-term Government of Canada bond yields have fallen from 1.76% at the start of 2020 to 1.25% in December 2020. Lower government bond yields have caused fixed mortgage rates to fall to an all-time-low, while a record-low policy interest rate has led variable mortgage rates to an equally record-low point. The Bank of Canada is also expected to keep their policy rate low until 2023.
The connection between interest rates and fintech companies in real estate
Further accelerating the reduction in mortgage rates is the proliferation of new fintech companies in the real estate industry. Competition between mortgage lenders, such as the emergence of private lenders and brokers in urban areas, have reduced rates. Fintech companies, such as those that help consumers compare mortgage rates between different lenders, have also made it easier for homeowners to get the best mortgage rate possible.
For example, WOWA.ca currently offers the lowest historical mortgage rate in Canada, with it being as low as 1.33% for a 5-year fixed-rate high-ratio (insurred) mortgages . Connecting consumers to numerous lenders quickly and easily where there is almost no middle man, have made low mortgage rates accessible for everyone in Canada.
The advance of fintech companies have also pushed down costs that were regularly seen in the real estate and mortgage industry. Fintech has helped lenders have direct access to customers, which cuts out the middle-man and saves on commission fees. Customers also benefit, as they can interact with their lender directly, making the process smoother, quicker, and cheaper. The availability of tools and calculators have also empowered consumers into making better informed decisions, such as what type of home they can afford, or how much they can save by making prepayments and decreasing their monthly mortgage payments.
While the pandemic has added uncertainty to the economy, monetary policy has helped make mortgages more affordable for homeowners. Low interest rates have also spurred housing demand, with most cities in Canada seeing record levels of home price growth and sales transactions. While it is uncertain if low policy rates by the Bank of Canada will remain, the advance and development of fintech companies have made low mortgage rates accessible to anyone, and anywhere.
By Justin Havre