Canadians have enjoyed ultra-low mortgage rates for several years now, but this spring marks a truly competitive season; even big banks have discounted their fixed rates to record lows, while a January Bank of Canada rate cut has led to the lowest Prime rate since 2010. Spring is traditionally the busiest time for mortgage providers, but demand and competition aren’t the only factors behind today’s low rates; global influences, especially in Europe, are also responsible for lender discounting.
The European Impact
Approximately $8.8 billion of Canadian mortgage bonds are denominated in euros and francs, the yields of which are being pushed below zero. This is because the European Central Bank has started buying euro government bonds in an effort to push its quantitative easy agenda. This is similar to the tactic used by the U.S. Federal Reserve; quantitative easing helps stimulate the post-recession economy, and maintains a liquid cost of borrowing. In the ECB’s case, such measures are to counter the fallout from economic turmoil in Greece, and oil’s downturn.
As a result, Canadian mortgage rate pricing has also dropped – investor interest for euro-denominated bonds is high. The lower interest rates are now being passed on to Canadian mortgage holders in the form of fixed rate mortgages.
Also read: Will Greece Run Out of Cash?>
Canada Is But One Global Player
The Bank of Canada often mentions external pressures or global events in its regular interest rate announcements. For example, in its latest announcement it stated, “The Bank expects global growth to strengthen an average 3 1/2 per cent per year over 2015-17… This is in part because many central banks have eased monetary policies in recent months to counter persistent slack and low inflation, as well as the effect of lower commodity prices in some cases.” The Bank of Canada’s decision always takes into account how the world’s largest economies are doing. It can’t raise or cut rates out of step of what is happening in the U.S. or Europe. That would lead to Canadian businesses and rates becoming uncompetitive.
Other External Factors
Europe is one line of financing for Canada. Remember, Canadian fixed rates are based on the five-year government bond yield. This is where the Bank looks to see where rates are headed and how they should set the overnight lending rate. But that yield curve can be affected by everything from oil prices, to the U.S. economy to household debt levels. The five-year government bond recently fell to a record low of 0.58 per cent, after Bank of Canada Governor Stephen Poloz announced the overnight rate cut in January. This is why new mortgage seekers are finding posted rates as low as 2.74 per cent right now.
What’s In Store For Bond Prices?
European Central banks are expected to keep rates low for the long term to encourage growth and stimulate the economy. Canadian mortgage holders can continue to benefit. As new as it may sound to Canadians this relationship of mortgage lending dates by to the 18th century. First developed in Prussia it is the oldest market of covered bonds, a certain kind of mortgage backed security.