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Monday Mortgage Update: January 16, 2012

Exciting news for Canadian consumers emerged last week. According to an article by Bloomberg last Monday, mortgage spreads hit their widest level in three years. Mortgage spreads are the difference between the lower Government of Canada (GoC) bond yields and the higher lender mortgage rates, which is essentially the lenders’ margin. Canada’s average 5-year mortgage rate is 4.04% (or 404 basis points) higher than the yield on 5-year Government of Canada bonds. To put this into perspective, for the past 20 years, the average spread has been 241 basis points. Banks take home larger profits when the spread widens between the mortgage rates they offer to consumers and Government of Canada bond yields.

Lenders held off, but finally lowered their rates, decreasing their margins late last week. As of January 12th, a mortgage war kicked off, led by BMO’s Low Rate mortgage at 2.99% for a 5-year fixed term. This represented the lowest bank advertised 5-year fixed rate ever in Canadian history. ING Direct responded with a 10-year fixed rate mortgage at 3.99%, which set a new record low for 10-year rates. Then, TD Bank and RBC dropped their discounted 4-year fixed rates to 2.99%. Scotiabank followed by cutting their discounted 3-year fixed mortgage rate, where it currently sits at 2.89%.

The Bank of Canada said last month that household debt at an all-time high represents the main domestic risk to financial stability in Canada – for fear that homeowners may struggle to pay their debts when interest rates rise. Canadian lenders however are signalling that low rates are here to stay, in the short-term at the very least.

What caused this sudden drop in fixed rates?

Government of Canada bond yields drive fixed rates and since GoC bond yields have been plunging the past few months, it’s not surprising to see lenders respond by increasing their discounts on fixed rates.

Another reason is due to the time of season. The first few months after the holiday season are generally slower for most businesses, and this applies to the mortgage market. In an interest to gain market share, lenders will offer special low fixed rates over the short-term, which is what we are seeing now.

How will the Bank of Canada respond to the potential of more consumers borrowing? Tomorrow marks the first interest rate announcement of 2012.

Where are Current Mortgage Rates this week?

A history of discounted weekly 5-year fixed mortgage rates and 5-year variable mortgage rates

What mortgage products are Canadians buying?

With the banks fighting for the lowest mortgage rates in Canada, specifically, short-term fixed rates, market share popularity in variable rates could see a dip in the future.The results of Canadian mortgage product interest through resembled our last mortgage update, except for a small minority showing interest in cash-back mortgages this time around.

Note:  This is simply a small sample size and does not represent the entire market. It does, however, offer some useful insight.