Emergency BoC rate cut will fuel home sales
March 18, 2020
The 0.5 per cent reduction in the Bank of Canada (BoC) overnight lending rate on March 13—the second such cut in 9 days—in response to the coronavirus pandemic will “add fuel to the fire” in the housing market. Some homebuyers could be paying mortgage rates as low as 1.95 per cent.
"This unscheduled rate decision is a proactive measure taken in light of the negative shocks to Canada’s economy arising from the Covid-19 pandemic and the recent sharp drop in oil prices," the central bank stated. The statement added the bank’s governing council is ready to further lower rates if necessary to "support economic growth and keep inflation on target.”
When questioned, Bank of Canada Governor Stephen Poloz said even a negative interest rate is on the table but told reporters it would likely not be needed “because of our financial firepower.”
The leading rate reductions are part of a $10 billion stimulus package announced March 13 by the federal government.
The rate cut immediately reduced the Bank of Canada lending rate to 0.75 per cent, the lowest since the 2008 global financial crisis.
“Those borrowers who have stuck with variable rate mortgages now look like geniuses,” said Vancouver mortgage broker Peter Kinch. “Someone who has a variable rate mortgage at minus 1 per cent would be paying a 1.95 per cent rate for a mortgage today” he said.
The rate cut will also affect the mortgage stress test, which was scheduled to be modified on April 6 to make it reactive to the average contract rate for five-year mortgage loans at big banks. The stress test had required a borrower to qualify at the posted five-year mortgage rate plus 2 per cent, or at the Canada Mortgage and Housing Corp. rate of 5.19 per cent, whichever was higher.
Now, the mortgage stress test will be linked only to the current average contract rate available at federally regulated banks.
On March 13 this five-year rate was an average 2.42 per cent, which means a homebuyer would need to qualify at 4.42 per cent—the lowest level since the mortgage stress was expanded in January 2018 to include all homebuyers.
“The housing market in Vancouver and Toronto is already heating up and these rate cuts will add fuel to the fire,” said Kinch, head of the Peter Kinch Mortgage Team with Diversifi Alternative Investments Ltd.
Finance Minister Bill Morneau, appearing on live national TV on March 13 with Poloz and Jeremy Rubin, said he would deliver a fiscal stimulus package the week of March 16.