Two of Canada’s biggest banks lowered residential mortgage rates on Tuesday at a time when falling bond yields are slashing funding costs for financial institutions.
While it is unclear how low mortgage rates will ultimately go, some observers suggest that bond yields could dip further over the coming months. That could be a boon for consumers in a slowing housing market.
BMO reduced its posted rate for its five-year fixed-rate mortgage by 0.10 per cent to 5.29 per cent, effective Wednesday.
It is also offering “special” low rates, including a five-year fixed mortgage at 3.49 per cent. That discounted rate is subject to change without notice, BMO said in its release.
Toronto-Dominion Bank later matched BMO’s posted rate of 5.29 per cent for a five-year closed mortgage, also effective Wednesday.
TD also announced a new “special fixed rate” offer of 3.89 per cent for a five-year closed mortgage loan.
Five-year fixed-rate mortgages continue to be the most popular choice for Canadian homeowners and there is mounting speculation that other banks were likely to follow suit.
That is because bond yields have continued to tumble in recent weeks amid ongoing economic woes in the United States. That, in turn, has made it cheaper for banks to fund mortgages.
“The (bond) market expects the Federal Reserve to undertake more stimulative measures to reduce long-term interest rates, most likely by purchasing treasury notes in the coming months,” said Sal Guatieri, a senior economist with BMO Capital Markets.
The Fed could take that action as early as November. “So the market is already moving ahead of that expectation of Fed treasury purchases and has driven down longer-term interest rates,” Guatieri added.
The Bank of Canada, meanwhile, is expected to hold its trendsetting interest rate steady for the foreseeable future — another factor driving market sentiment on this side of the border.
While variable-rate mortgages are largely influenced by the banks’ prime rates, conventional fixed-rate mortgages are linked to the bond market.
Banks generally try to match maturities when they finance mortgages with bonds. That means five-year mortgages are paired with five-year bonds.
The yield on the five-year Government of Canada benchmark bond was 1.87 per cent on Oct. 8, according to data on the Bank of Canada’s website.
Guatieri, for one, expects government bond yields to ease “modestly further” over the coming months.
“For the most part, the interest rate environment should remain quite benign and supportive of the economy,” he added.
SOURCE: THE TORONTO STAR