A slowing economy has started to drive mortgage rates lower, and competitive pressure among Canada’s big banks means there are likely more drops to come, experts say.
Earlier this week, RBC lowered the posted rate for its flagship 5-year fixed mortgage to 3.74 per cent, from 3.89.
There’s likely more to come, according to mortgage broker Jaimes Laird, co-founder of rate-monitoring site Ratehub.ca.
“I think we could see 5-year fixed at 3.5 per cent by the end of February,” said Laird.
RBC’s move comes on the heels of a decision from the Bank of Canada on Jan. 9 to hold its key overnight lending rate at 1.75 per cent. In its decision, the Bank of Canada cited concerns the Canadian economy is slowing down, particularly due to low oil prices and weakness in the housing market.
The overnight lending rate is the rate banks charge each other for short-term loans, and it heavily influences the prime rate that banks charge to their best customers.
With RBC being the biggest bank in the country, other lenders are all but certain to match the cut according to Laird, co-founder of rate-monitoring site Ratehub.ca.
“When a competitor who’s bigger than you lowers their price, if you want to keep your market share, you follow,” said Laird.
RBC, Canada’s largest bank by a variety of measures, controls roughly $250 billion of the $1.5 trillion Canadian mortgage market.
“This is when banks pay the most attention, because spring is mortgage season,” said Laird. “So if they’re not competitive, they can miss their mortgage market share targets for the year.”
It only takes one major bank to kick off a round of cuts. And it’s often a different one each year, Laird said.
“It really depends from year to year who’s wanting to improve their mortgage share. Sometimes, they’ll say ‘we feel a little over-exposed to the mortgage market.’ RBC has already said they wanted to boost their share of the mortgage market from what it was in 2018, so it’s not a huge surprise they did this,” Laird said.
While RBC was the first to lower its posted rate, Laird says he’s already noticed more flexibility lately from TD.
“They’ve been doing this for about the last week, but more quietly,” said Laird.
The spread between fixed and variable rate mortgages has also been shrinking lately, as banks try to lock consumers in.
“Fixed are more profitable. They lock in their profit margins. So right now, they’re encouraging people to lock in. That’s why the spread is changing,” Laird said.
Since last July, the price of oil has fallen from $71 (U.S.) per barrel to as low as $43. In mid-day U.S. trading Thursday, the benchmark West Texas Intermediate was selling for $52.01 per barrel.
“The drop in global oil prices has a material impact on the Canadian outlook, resulting in lower terms of trade and national income,” the Bank of Canada said in its Jan. 9 statement.
Consumer spending has also been taking a hit as Canadians deal with a slowing housing market, the Bank said.
“Consumption spending and housing investment have been weaker than expected as housing markets adjust to municipal and provincial measures, changes to mortgage guidelines, and higher interest rates. Household spending will be dampened further by slow growth in oil-producing provinces,” the Bank said.
by Josh Rubin, The Star