Daniel Vaskanin, Mortgage Financial Corporation
1 Tranquility St N3R 3H6 Brantford, ON, Canada

The optimal mortgage term changes with the wind and the winds have changed. Whereas variables were delectable at prime -1.20% or better just weeks ago, now not so much. With nationally available conventional 5-year fixed rates as low as 2.49% and the lowest variable at 2.59% (prime 0.36%), the risk/reward of variables isn’t as compelling (see: sample scenario). That is, unless it takes the Bank of Canada 2+ years to gradually hike rates again. Mind you, this is based on h...ypothetical rate scenarios. There are many other fixed vs. variable factors to consider, including the lower potential penalty risk in a variable, the ability to lock a variable in later, etc.

We anticipate the Bank of Canada will cut its policy rate further to just 0.25% and turn to large-scale asset purchases, also known as quantitative easing, a tool that has not been used in Canada. Think twice if you believe record-low rates will stoke real estate prices. The nation’s biggest bank is also forecasting a stunning 18% plunge in Q2 GDP. Here’s a long-term chart of quarterly GDP if you’re curious how big -18% is.

Drastic rate cuts announced by the Bank of Canada and the Fed is the most visible earnings headwind for the banks, says National Bank Financial. Worse yet, expect more than a 100% increase in loan loss provisions, it says. We believe the next few quarters will reflect recessionary-like credit performance. It’s no wonder banks are padding their mortgage rates.

Toronto Life article featured a restaurant owner contemplating a costly second mortgage to keep his business afloat. How many countless others are in the same boat? It’s why qualified entrepreneurs need home equity lines of credit which still have rates as low as 2.85%, by the way, a rate that seems completely illogical (too low) given rising credit risk and HELOC liquidity constraints. Article: https://torontolife.com//im-contemplating-taking-a-second/

No one knows if the Bank of Canada will ultimately cut its key interest rate below zero. If it does, evidence from the IMF suggests negative rates expand credit supply and cause banks to rebalance their portfolios from liquid assets to creditand cut loan rates.