9 Ways to Keep Your Credit Score as High as Possible (Part II)

In our previous post, we spoke about the fact that there are so many credit score providers out there, all providing different results, and chances are none of those results are the credit score lenders see when you apply for a loan product such as a mortgage, credit card or car loan.

How are you supposed to optimize your credit score when you don’t even know what it is? The answer is by focusing more on your overall “credit hygiene” rather than on any one particular score.

Dental hygiene is preventative maintenance to ensure your teeth and gums are the best they can be at all times. Having a similar routine for your personal credit history can be equally important to avoid problems when you least need them—like when buying or refinancing a home.

If you are always employing best practices, then you are optimizing your credit score and your overall credit profile, regardless of who is checking, when they are checking and what is being counted and reported.

Unfortunately, more credit in the wrong hands can lead to abuse. Some people rely on credit to supplement their income and end up in an untenable situation. These credit hygiene tips are intended for people who are responsible with credit.

Never Go Over Limits – Leave Some Room

When you have a credit card or line of credit hovering around its limit, you are at risk of going over, which is not a good thing for your credit score. And it might happen innocently—you started out under the limit, but with interest charges and possible over-limit penalties, you are now in the Badlands.

Even when you deploy a balance transfer promotion or some form of interest-free period, you should leave room at the top.

It’s like when ordering a coffee, leave room at the top for the milk—even if you take it black, avoid spillages.

Accept All Offers of Increased Limits

You should usually welcome credit limit increases. You look healthier and stronger to the casual reader, because your limits have some heft to them. And perforce, you instantly reduce your percentage utilization of credit with an increased limit. This often results in a higher credit score.

Equifax Canada states percentage utilization has a 30% weighting on your personal credit score.

Spread Around Your Balances

When maximizing your personal credit score, you should look at your utilization of available credit for each individual credit facility. If your goal is to maximize your score at all times, but you do carry credit balances, try to spread it around, rather than cluster it all on one card. One way this can arise is when you use balance transfer promotions to reduce interest expenses. You’ll have to evaluate the trade-offs of each approach.

Exercise All Cards and Lines of Credit

We tend to favour one particular credit card (maybe we like their rewards program) and we might neglect our other cards. If you are trying to maximize your credit score, it is good to use all available credit fairly regularly, even if it’s just for a brief moment every few months.

These trade lines can get stale and they are not pulling their full weight. Update the DLA (date of last activity) with a modest transaction and then pay it online immediately.

Coincidentally, only yesterday I received a message from my bank telling me my personal line of credit was now dormant and no longer accessible. I had not used it in eighteen months—not following my own guideline!

If in Doubt, Do NOT Close a Credit Card

It will rarely be correct to close older, unused credit facilities since they are contributing “score juice.” If you want to close the card to avoid an annual fee, just ask the card issuer to downgrade your card to a free card. You will retain your valuable history, but avoid annual fees (and the spectre of forgetting to pay the fee).

Equifax Canada states your history can have a 15% weighting on your personal credit score.

Use It or Lose It

If you never borrow money, or you have a solitary credit card in your wallet and you never actually use it, eventually you will have nothing generating a credit score for you. And you may end up with no score at all. And that can really cramp your style when you need a mortgage.

Pay Your Active Credit Cards At Least Twice Monthly – The Statement Date Strategy

I keep track of the statement cycle of my oft-used cards, and I pay the balance in full several days BEFORE the next statement is issued. The card issuer typically reports my statement date balance to the credit bureaus – so I always want that balance to be small, and that way my utilization ratios are really good.

And within a week or so of the statement being issued, I go back in and pay the statement balance in full. This ensures I never have interest charges on my core credit card usage, since the balance is always brought to zero before the due date.

The smaller the limits on your credit cards, the more dramatic the impact of the statement date strategy.

Pay Disputed Items – Then Argue Your Position

You may know someone who was offended by charges they were certain did not belong on their credit card statement. They refused to pay and preferred to wait out the investigation process. Unfortunately, by doing that they run the risk of interest charges and late payments.

My own experience has always been the card issuers do the right thing when fraud or outright billing errors are at hand. So, I pay and wait for the credit to come back to my account when the investigation is complete.

NOTE – if the fraudulent charges are very large and quite serious, this is a different matter altogether and you should strategize the best approach with the authorities and management at the card issuer.

Scour & Clean All Reporting Errors

There might be some incorrect information in your personal credit history that is needlessly dragging down your score. Those are easy and necessary fixes. And the impact on the personal credit score can be profound. There are many types of errors, but two examples are:

• You have two or more personal profiles with the credit bureau, so your information is scattered and diffused. Combining it all into one credit report could well increase your score and strengthen your look. (This often happens to people whose name is hard to spell, or who have legally changed their name.)
• You completed a consumer proposal and all the debts included in the proposal should be reporting zero balances and should NOT be “R9s.”

Each agency provides a mechanism on its website for reporting errors. Mortgage brokers can fast-track an investigation with Equifax Canada for their clients. What might take a consumer two months we can often get done in a few days.

The Takeaway

The credit reporting agencies may generate a different score for credit card issuers, car dealerships or mortgage lenders, and the score they provide the consumer upon request is typically none of these. Therefore, you should be more concerned with ensuring you are always using best practices that will score well, regardless of who is doing the measuring.

The credit hygiene strategy ensures your credit history is a weapon you can wield with confidence, and that whatever method is generating your credit score, it will always be optimized and at its maximum potential.

–Ross Taylor

Latest in Mortgage News: Home Price Recovery Not Expected Until 2022

On the heels of new data showing that home prices tumbled in April across many of Canada’s largest cities, CMHC is forecasting it will take at least until 2022 for a return to pre-recession levels.

The federal housing agency modelled out a pandemic scenario that was “not as severe as this,” CEO Evan Siddall said in a teleconference following the release of CMHC’s annual report. “And I’m sure that you’d understand that the realm of plausibility has expanded significantly as a result of all the experience we’ve had…Tens of thousands of Canadians are having trouble meeting their mortgage commitments.”

Siddall noted that early figures suggest about 10% of CMHC’s insured mortgages are now in deferral.

CIBC economists say the housing market faces challenges in the coming 12 to 18 months, particularly once the mortgage deferral periods run out.

“Forced sales will add to supply, and probably outweigh the offsetting impact of reduced supply of new units,” they wrote.”In the coming few quarters, housing activity will dance to the volatile tune of economic activity. During that period, we expect continued reduced levels of activity, and an unreliable and volatile price mechanism.”

Prices are already down in April, according to recent data from a number of local real estate boards, including:

• The Greater Toronto Area: Home sales down 67% year-over-year; average price down 11.8% month-over-month to $821,392
• Greater Vancouver Area: Home sales down 39.4% year-over-year; benchmark price flat month-over-month to $1,036,000
• Montreal Census Metro Area: Home sales down 68% year-over-year, median price for single-detached homes down 1.4% month-over-month to $360,000
• City of Calgary: Home sales down 63% year-over-year; detached benchmark price down 0.35% from March to $479,100

Most of the above home prices are still up compared to April 2019, although forecasts peg eventual year-over-year price declines anywhere from 5% (Capital Economics and RBC) to 10% (Moody’s).

CMHC chief economist Bob Dugan says that reliable forecasts are difficult to make given the many unknown variables, but made this prediction: “For Canada and for Ontario, I think, the best case we’re looking at … house prices getting back to their pre-recession levels, at the earliest, by the end of 2022.”

CMHC Declares $2B in Dividends in 2019

The Canada Mortgage and Housing Corporation returned more than $2 billion back to taxpayers in the form of dividends to the Canadian government, according to its 2019 annual report.

The federal housing agency also reported its insurance in force stands at $429 billion, down 4% from $448 billion in 2018, and down from $526 billion in 2015.

CMHC attributed this to “run-off of existing policies-in-force, primarily in portfolio insurance due to reduced volumes since the introduction of pricing increases commensurate with revised regulatory capital requirements in 2017.”

In an update on the First-Time Home Buyer Incentive, CMHC reported 2,950 applications for the shared-equity program as of December 31, 2019, representing financial commitments of $56 million. The program has a $1.25-billion budget with a goal of assisting up to 100,000 first-time homebuyers.

In his parting Message from the President, outgoing CEO Evan Siddall noted one of the agency’s accomplishments during the year being to “speak out against homeownership policies that stimulate demand via increased borrowing.” He added: “Containing housing demand and limiting indebtedness are also reinforced by the mortgage insurance stress test, notwithstanding opposition from mortgage brokers, realtors and homebuilders. Our role is to promote housing affordability, not to stay silent when the real estate industry seeks to preserve its income at the expense of housing affordability.”

New Bank of Canada Governor

We learned earlier this month that Tiff Macklem will become the next Bank of Canada Governor on June 3, replacing outgoing head of the Bank Stephen Poloz.

Macklem, a former deputy governor, was passed over for the job seven years ago to Poloz. Since then he has spent the past six years as dean of the University of Toronto’s Rotman School of Management.

In a press conference following his appointment, Macklem indicated support for current policy measures and confirmed he sees supporting market stability and providing liquidity as the bank’s top priorities. He also noted that he sees negative interest rates as “disruptive” at the present time, and that the bank isn’t justified in making firm economic forecasts given the current market instability.

–Steve Huebl

Why Is My Credit Score Different From What Lenders See? (Part I)

It’s pretty easy to track your credit score these days⁠—perhaps through a paid subscription to Equifax Canada or Trans Union Canada, or through free offerings from your bank, or other entities such as Borrowell, Credit Karma, Mopolo or Mogo.

But there is no consistency among these various sources. In fact, there can be dramatic differences. Therefore, you should focus more on your overall “credit hygiene” rather than any one particular score. Meaning, focus on best practices at all times. More on that later.

CBC News ran a solid investigative piece last fall called “Why 4 websites give you 4 different credit scores and none is the number most lenders actually see.” One Canadian encountered a 200-point difference between his highest and lowest scores from several score providers!

Scott Terrio, manager of consumer insolvency at Hoyes, Michalos & Associates Inc., thinks Canadians are obsessed with their credit scores. He is perhaps jaded by having met thousands of insolvents, many of whom had high credit scores.

Terrio notes, “It’s also important to remember that the credit score you see might not be the one the bank sees. That’s right. Lenders can (and do) order credit reports that are designed to meet their specific needs.”

What is their merit then? What exactly are people tracking? What does it even mean when someone tells you what their credit score is?

How Useful Are Free Credit Scores When Applying for a Mortgage?

To bring the conversation around to mortgage borrowing, the only credit score that matters is the one your lender sees when your application is submitted. And it’s almost certainly NOT a score you have seen for yourself from all the score providers out there.

These days, prospective mortgage clients are often excited to tell me what their credit score is. I bite my tongue, and instead applaud them for caring and for monitoring their credit, while explaining that, no, a screenshot of their Borrowell credit score is not sufficient for our mortgage lenders.

We actually need their signed consent to access a comprehensive (and completely different-looking) credit report.

FICO Score 8 is the Gold Standard

For the most part, mortgage brokers submit their mortgage applications with an Equifax Canada credit report attached. This report will display a few different measures to the lenders, but the one we pay the most attention to is called FICO Score 8. It’s the number we cite when a lender wants to know our mortgage applicants’ credit scores.

FICO says 90% of Canadian lenders use it, including major banks. But Canadian consumers cannot access their FICO score on their own.

Some banks and other mortgage lenders rely solely on the TransUnion credit report, which may use the Credit Vision Risk Score, and others use both reporting agencies. But they can all generate a FICO score.

Rob McLister, founder of RateSpy.com, picked up the cause last week with a short piece on the need to standardize the credit score that various providers of free credit scores offer. He wrote, “It’s time for companies hawking partly useful free scores (the Mogos, Borrowells and Credit Karmas of the world) to offer a more practical score. For mortgage purposes, FICO 8 is best of breed.”

Why You Should Worry About Your Credit Hygiene, Not Your Credit Score

I am delighted Canadians care about their credit history—it is so essential to many aspects of life, not just for major events like financing a home or an automobile. For example, some employers check candidates’ credit history, and so do most landlords when considering tenancies.

We are not here extolling the need for standardized credit score reporting. Because that is not going to happen anytime soon, as desirable as it may seem. Instead, we will talk about best practices of maintaining great credit hygiene.

In Part II, we will look at various ways you can proactively manage your personal credit history and keep your score (whatever score that may be) optimized at all times.

Reaction to CMHC’s New Restrictions on Insured Mortgages

Obtaining mortgage insurance for a home purchase is about to become more challenging on July 1, particularly for first-time buyers.

The Canada Mortgage and Housing Corporation (CMHC), Canada’s national mortgage insurance provider, unveiled stricter underwriting policies on Thursday for insured mortgages. The measures include:

• Limiting Gross Debt Service (GDS) ratios to 35% (from 39%)
• Limiting Total Debt Service (TDS) ratios to 42% (from 44%)
• Raising the minimum credit score to 680 (from 600) for at least one borrower
• Banning non-traditional sources of down payment that “increase indebtedness”

“COVID-19 has exposed long-standing vulnerabilities in our financial markets, and we must act now to protect the economic futures of Canadians,” said CMHC CEO Evan Siddall in a statement.

“These actions will protect homebuyers, reduce government and taxpayer risk and support the stability of housing markets while curtailing excessive demand and unsustainable house price growth.”

What do the Changes Mean for Buyers?

CMHC’s changes will effectively reduce homebuyers’ purchasing power by up to 11%, according to RateSpy.com.

“Someone earning $60,000 with no other debt and 5% down could afford approximately 10.9% less home under CMHC’s new rules,” the site noted. “That’s like jacking up the minimum stress test rate from 4.94% (where it lies today) to 6.30%!”

Roughly 18% of CMHC’s high loan-to-value originations had a Gross Debt Ratio of more than 35%, according to a report from RBC Economics.

And about 5% of CMHC’s originations had credit scores of less than 680, according to data from Mortgage Professionals Canada.

CMHC Going It Alone?

One of the biggest questions since a leak of the new rules made the rounds on Thursday has been whether CMHC’s competitors, Canada Guaranty and Genworth Canada, would have to adopt the stricter underwriting measures as well.

According to the RBC Economics report, they won’t, at least not for now.

“Genworth Canada (MIC) and Canada Guaranty (CG) confirmed to us that they have not been told to adopt any or all of the same underwriting changes,” the report notes. “…although we would not be surprised if they were to eventually adopt some (e.g., down payment sources, credit score) or even all of the changes.”

For what it’s worth, that same report notes that it’s “interesting” that CMHC delivered the announcement, since mortgage insurance market changes have historically been announced by the Department of Finance.

Mortgage Industry Reaction

The announcement elicited wide-ranging opinions from throughout the mortgage industry. Here are some of them…

“I think the changes are well-intentioned, but poorly timed. I understand the rationale, but the people most at risk of default are already in their first home and insured. Disqualifying purchasers now won’t improve the quality of the portfolio already at risk,” Mortgage Professionals Canada CEO Paul Taylor told CMT.

“If house prices do soften, from a public policy perspective, that’s precisely the time to bolster support for first-time buyers. Making homes more difficult to finance will, once again, reserve properties for purchase by the already well-capitalized.”

Taylor added that the timing of the announcement, in the midst of a global pandemic, could further slow the market, on top of the 9-18% home price reductions forecast by CMHC.

“The Federal government is spending billions of dollars to support a struggling economy,” Taylor said. “These changes actively suppress activity.”

Ron Butler of Butler Mortgages Inc. also understands CMHC’s motive, acting essentially as an insurance company.

“They must be prudent in the face of an economic disaster,” he said. “It’s hard to argue against better credit scores when you’re insuring a $940K mortgage. (And) 680 is simply a proper credit score.”

And while first-time buyers may face the brunt of this policy change, Butler noted they can easily choose a lower-cost property, which may be easier in certain regions compared to others.

“Ultimately, I’ll  take these changes over a 10% minimum down payment any day,” Butler said, referring to the policy change floated by Siddall several weeks ago.

Wrong Time to “Tinker” With Policy

While many understand where the policy adjustments are coming from, others are adamant that now is the worst time to implement such changes.

“I would argue against tinkering with mortgage underwriting criteria in light of the pandemic-driven housing market slowdown,” True North Mortgage Founder and CEO Dan Eisner told CMT. “Some of these changes may be needed, but the timing is questionable…it’s as silly as buying an umbrella after a flood. Now is the time to be encouraging economic activity.”

Asked which measure will be the most restrictive for first-time buyers, Eisner said first-time buyers will be most-impacted by the increased income requirements.

“Keep in mind, this change arrives not too long after the Department of Finance implemented the qualifying rate stress test, which already pushed many homebuyers out of the market.”

Some, including Butler, foresee a brief increase in home-buying as people rush to purchase before the new rules take effect.

“There will be a minor spike in sales based on this change, and then comes the September Cliff,” Butler said, referring to an expected drop in activity once the widespread mortgage deferral programs come to an end this fall.

–Steve Huebl

BANK OF CANADA CUTS RATES 50 BPS TO 0.25%

 

Bank of Canada Moves to Restore “Financial Market Functionality”

The Bank of Canada today lowered its target for the overnight rate by 50 basis points to ¼ percent. This unscheduled rate decision brings the policy rate to its effective lower bound and is intended to provide support to the Canadian financial system and the economy during the COVID-19 pandemic (see chart below).

THE STOCK MARKET HAS HAD THREE GOOD DAYS

As the chart below shows, the Toronto Stock Exchange has retraced some of its losses in the past three days as the US and Canada have announced very aggressive fiscal stimulus. As well, the Bank of Canada has now lowered interest rates three times this month, with a cumulative easing of 1.5 percentage points. The Federal Reserve has also cut by 150 basis points over the same period. In addition to lowering borrowing costs, the central bank has also announced in recent days a slew of new liquidity measures to inject cash into the banking system and money markets and to ensure it can handle any market-wide stresses in the financial system.

The economic pain is just getting started in Canada with the spike in joblessness and the shutdown of all but essential services. Similarly, the US posted its highest level of initial unemployment insurance claims in history–3.83 million, which compares to a previous high of 685,000 during the financial crisis just over a decade ago. These are the earliest indicator of a virus-slammed economy, with much more to come. All of this is without precedent, but rest assured that policy leaders will continue to do whatever it takes to cushion the blow of the pandemic on consumers and businesses and to bridge a return to normalcy.

–DR. SHERRY COOPER

SOLID JOBS REPORT IN CANADA AND US AHEAD OF VIRUS SPREAD

Steady February Job Market Ahead of Virus Scare

Job growth in Canada remained robust last month with net employment gains of 30,300 – all of which were in private-sector full-time jobs. The unemployment rate rose a tick to 5.6%, but that is still down from a year ago and around multi-decade lows. The positive news was wage growth remained strong at an annual rate of 4.1%, well above the rate of inflation.

But these data sets are a rear-view mirror snapshot of economic activity. They will matter little for financial markets fixated on the growing impact of the Coronavirus that sparked dramatic rates cuts by both the Federal Reserve and the Bank of Canada this week.

That the labour market held up in February is not a surprise. Earlier reports on consumer and business confidence were surprisingly resilient in the past month despite disruptions from rail blockades and Coronavirus concerns abroad. The Ontario teachers’ strike, however, did result in reduced hours worked for the educational services sector.

British Columbia and Ontario posted the most significant job losses last month; they also saw the unemployment rate rise notably as more people searched for work. Quebec posted job gains of 20,000 continuing a trend of substantial growth in employment in the province for several months, and the Quebec unemployment rate fell to 4.5%, the lowest since at least 1976. For the first time in recent memory, Quebec has the lowest unemployment rate in Canada (see table below), surpassing BC for that honour.

In February, most of the disruptions from the Coronavirus were concentrated in China. Imports from that region to Canada were reportedly down in January in numbers released separately this morning, but mainly due to fewer finished goods (cell phones) rather than a significant drop in the supply of industrial inputs.

The US jobs report for February was also released this morning, showing considerable strength. Employment surged, and the jobless rate declined to match a half-century low of 3.5%. The data did little to alter a flight to safety in financial markets, as investors remained focused on the potential economic fallout from the virus. The yield on the 10-year Treasury was down 20 basis points to 0.74% while the S&P 500 fell 2.6%, bringing the monthly decline to -11.6% as of this writing. The US Treasury 5-year yield is only 0.56%.

Canadian financial markets have been similarly impacted, with the government of Canada 5-year yield trading this morning at .65%, down from 1.69% at the start of this year (see chart below). The graph shows the government bond market in a free fall. The TSX has dropped -8.32% over the past month. Oil prices are down sharply, falling -16.7% over the same period. Gold prices are up sharply, reflecting its safe-haven status.

Bottom Line: The markets currently are predicting overnight interest rates will continue to fall as the Fed and the Bank of Canada react aggressively. Another cut by the BoC is priced in at its April 15th meeting. The Fed is expected to cut again at its regularly scheduled meeting on March 18th.

At times like these, there is no predicting how far this will go or for how long. The best advice is to avoid panic selling. From a housing market perspective, lower interest rates make housing more affordable. Governor Poloz, following a speech in Toronto yesterday, said that restoring confidence is crucial. He defended the Bank’s 50 bp rate cut–its most aggressive move in more than a decade–from criticism that it will fuel excessive household debt accumulation. He argued that the rate cut would improve cash flow for those with flexible rate mortgages and will boost confidence. He believes the virus could slow housing demand and suggests that the Bank’s actions will forestall a damaging slowdown in the housing market.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market,” he said. “In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

He might well be right about that, as none of us know just how close to pandemic we might be. In any event, the monetary easing provides a buffer for the economy.

–DR. SHERRY COOPER

BoC’s Poloz Says Rate Cuts Will Stabilize Housing, Not Lead to “Froth”

Bank of Canada Governor Stephen Poloz attempted to ease concerns yesterday that lower interest rates will further stoke overheated housing markets.

Poloz argued this week’s rate cut was needed to combat the risks posed by the current global health crisis, adding that the easing will in fact help stabilize housing markets.

“Not surprisingly, the threat to the global economy of COVID-19—the coronavirus—played a central role in our deliberations, and we are coordinating actively with other G7 central banks and fiscal authorities,” he said in a prepared speech on Thursday.

The 50-bps rate cut was in stark contrast to the cautious “wait-and-see” approach that the Bank had previously adopted as it held rates steady while dozens of central banks around the world were cutting rates to head off growing economic headwinds. This week’s rate move also flew in the face of Poloz’s own fears about further stoking heated housing markets.

Just two months ago, Poloz told BNN Bloomberg: “Should this housing rebound continue, we will be watching for signs of extrapolative expectations returning to certain major housing markets—in other words, froth…It can be very unhealthy when the situation becomes speculative.”

But extraordinary times call for extraordinary measures.

“…Risk management demands a prompt and sizable policy response to larger shocks to ensure that the economy remains well anchored. Governing Council agreed that the downside risks to the economy today are more than sufficient to outweigh our continuing concern about financial vulnerabilities,” he told a Toronto audience.

“Indeed, declining consumer confidence would naturally lead to reduced activity in the housing market. In this context, lower interest rates will actually help to stabilize the housing market, rather than contribute to froth.”

Capital Economics’ senior economist Stephen Brown hinted at this in a research note published last week.

“While [the Bank of Canada] has been worried about the effects of looser policy on house prices, it may become more welcoming of a further boost to housing wealth if equity values continue to plummet.”

That seems to be Poloz’s thinking. Even if people are losing confidence (and money) as a result of rising coronavirus infections and plummeting stock markets, they can at least be reassured that the value of their home is continuing to rise (so long as you’re not a first-time buyer looking to enter the market).

“Further, we expect that the B-20 mortgage lending guidelines will continue to improve the quality of the stock of mortgage debt,” Poloz added.

Remember, these are the same lending guidelines (for uninsured borrowers) that OSFI is proposing to loosen as early as this spring, pending a review of public consultation.

More Cuts Are on the Way

While Poloz is defending the Bank’s larger-than-expected rate cut this week, the easing is still far from done, at least as far as the markets are concerned.

Canada’s 5-year bond yield continued to fall on Thursday, coming within 0.36 percentage points of its all-time low. The continued panic over the growing fallout of COVID-19 has markets pricing in up to 75 bps of rate cuts by October, with the next cut coming as early as April.

By the time all is said and done, this week’s 50-bps rate cut may look like just a warm-up.

–Steve Huebl

Canada’s Prime Rate Falls to 3.45% Following BoC Rate Cut

Canada’s prime rate fell to 3.45% today for the first time since July 2018.

This is good news for floating-rate mortgage holders and those with Home Equity Lines of Credit or regular lines of credit. And it’s all thanks to Canada’s big banks passing along the full 50-bps rate cut delivered by the Bank of Canada yesterday.

Many were expecting the banks to keep some of those savings for themselves to shore up their own balance sheets, but RBC Royal Bank led the way yesterday evening by announcing the full 50-bps reduction to its prime rate. The rest of the country’s big banks quickly followed suit, save for National Bank of Canada (as of this posting).

Another exception is TD Bank’s mortgage prime rate, which remains 15 bps higher at 3.60%, as opposed to its regular prime rate of 3.45% that applies to Home Equity Lines of Credit.

All of this followed the Bank of Canada’s decision to drop its overnight target rate by 0.50% to 1.25% on Wednesday—where it hadn’t been since October 2018—due to fears of a deepening economic downturn caused by the coronavirus, a.k.a., Covid-19.

“…The COVID-19 virus is a material negative shock to the Canadian and global outlooks,” the Bank said in its statement, adding that additional policy easing isn’t out of the question.

“…the outlook is clearly weaker now than it was in January,” it added. “As the situation evolves, Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Additional Easing Expected in April

Many observers and the markets at large expect the Bank of Canada to deliver another 25-bps rate cut next month, and potentially another quarter-point cut before the end of the year, which would bring Canada’s overnight rate to 0.75%.

“The growing risk of COVID-19 to the outlook suggests that the Bank of Canada will follow today’s 50-bp cut in interest rates with an additional 25-bps cut in April,” noted Stephen Brown of Capital Economics. “Given the Governing Council’s lingering concerns that looser policy will boost an already red-hot housing market, however, we think the Bank is unlikely to go further than that.”

Brian DePratto, Senior Economist at TD Economics, added the Bank’s move was “an important message…that the relevant authorities are ready and willing to act to support economic activity in the face of negative shocks.”

“And, as much as lower rates will further fan the flames of housing markets, the key five-year interest rate is in large part beyond the Bank of Canada’s control, reflecting global factors such as the Federal Reserve’s shock 50-basis-point cut [Tuesday] (and market expectations of further cuts south of the border),” he added.

What it Means for Mortgage Rates?

Yesterday’s BoC rate cut and subsequent fall in the prime rate will affect those with floating rates. But those looking for fixed mortgage rates will also see rates continue to decline due to the dramatic fall in Canadian bond yields over the past several months.

Bond yields, which lead fixed mortgage rates, have fallen from 1.69% since January of this year to under 0.90% today. Average fixed rates have subsequently fallen from a high of 2.50% in December 2018 to 2.44% currently, and we’re continuing to see lenders lower rates each passing week.

But the big winners yesterday were floating-rate mortgage holders, who will see their mortgage rates fall half-a-percent. That will result in interest cost savings of about $500 a year per $100,000 of mortgage, according to RateSpy.com.

Those with adjustable-rate mortgages will see their payments drop by about $24 per $100,000 of mortgage, while those with variable-rate mortgages will continue to make the same monthly payment but see their portion going towards principal increase while the interest portion decreases.

More Fuel for Home Prices

Coincidentally, on the same day of the BoC’s interest rate announcement, the Toronto Real Estate Board announced that the average home price in the Greater Toronto Area rose nearly 17% year-over-year in February to $910,290 (or $989,218 in the City of Toronto).

Home sales, meanwhile, were up nearly 46%.

Many have speculated that interest rate easing from the Bank of Canada would be added fuel for the country’s hottest housing markets, further driving up prices.

Not only that, but the Department of Finance announced recently it will be introducing a new qualifying rate for the insured mortgage stress test (those with less than 20% down payment) starting April 6.

That will make it easier for more buyers to qualify for larger mortgages (or qualify, period). That, in turn, will add to demand, which is already being driven by a lack of supply as well as buyers’ fear of missing out (FOMO) in certain hot markets.

“People are not concerned about coronavirus, people are not concerned about recession,” John Pasalis, president of Toronto property brokerage Realosophy Realty, told Bloomberg News. “The only things they’re worried about is buying a home—and if they don’t buy now they might spend more in the future.”

–Steve Huebl

INTEREST RATES NOSEDIVE AS BANK OF CANADA CUTS RATES 50 BPS

The Bank of Canada Brings Out The Big Guns

Following yesterday’s surprise emergency 50 basis point (bp) rate cut by the Fed, the Bank of Canada followed suit today and signalled it is poised to do more if necessary. The BoC lowered its target for the overnight rate by 50 bps to 1.25%, suggesting that “the COVID-19 virus is a material negative shock to the Canadian and global outlooks.” This is the first time the Bank has eased monetary policy in four years.

According to the BoC’s press release, “COVID-19 represents a significant health threat to people in a growing number of countries. In consequence, business activity in some regions has fallen sharply, and supply chains have been disrupted. This has pulled down commodity prices, and the Canadian dollar has depreciated. Global markets are reacting to the spread of the virus by repricing risk across a broad set of assets, making financial conditions less accommodative. It is likely that as the virus spreads, business and consumer confidence will deteriorate, further depressing activity.” The press release went on to promise that “as the situation evolves, the Governing Council stands ready to adjust monetary policy further if required to support economic growth and keep inflation on target.”

Moving the full 50 basis points is a powerful message from the Bank of Canada. Particularly given that Governor Poloz has long been bucking the tide of monetary easing by more than 30 central banks around the world, concerned about adding fuel to a red hot housing market, especially in Toronto. Other central banks will no doubt follow, although already-negative interest rates hamper the euro-area and Japan.

Canadian interest rates, which have been falling rapidly since mid-February, nosedived in response to the Bank’s announcement. The 5-year Government of Canada bond yield plunged to a mere 0.82% (see chart below), about half its level at the start of the year.

Fixed-rate mortgage rates have fallen as well, although not as much as government bond yields. The prime rate, which has been stuck at 3.95% since October 2018 when the Bank of Canada last changed (hiked) its overnight rate, is going to fall, but not by the full 50 bps as the cost of funds for banks has risen with the surge in credit spreads. A cut in the prime rate will lower variable-rate mortgage rates.

Many expect the Fed to cut rates again when it meets later this month at its regularly scheduled policy meeting, and the Canadian central bank is now expected to cut interest rates again in April. Of course, monetary easing does not address supply-chain disruptions or travel cancellations. Easing is meant to flood the system with liquidity and improve consumer and business confidence–just as happened in response to the financial crisis. Expect fiscal stimulus as well in the upcoming federal budget.

All of this will boost housing demand even though reduced travel from China might crimp sales in Vancouver. A potential recession is not good for housing, but lower interest rates certainly fuel what was already a hot spring sales market. Data released today by the Toronto Real Estate Board show that Toronto home prices soared in February, and sales jumped despite low inventories. The number of transactions jumped 46% from February 2019, which was a 10-year sales low as the market struggled with tougher mortgage rules and higher interest rates. February sales were up by about 15% compared to January.

–DR. SHERRY COOPER

FED EMERGENCY 50 BP RATE CUT

The Fed Brings Out The Big Guns

In a remarkable show of force, the US Federal Reserve jumped the gun on its regularly scheduled meeting on March 18 and cut the target overnight fed funds rate by a full 50 basis points (bps) to 1%-to-1.25%. This now stands well below the Bank of Canada’s target rate of 1.75% and may well force the Bank’s hand to cut rates when it meets tomorrow, possibly even by 50 bps.

However, the Fed is in active discussion with other central banks around the world, and the European Central Bank indicated earlier today that they would take any necessary actions. Central banks in the euro-area and Japan have less scope to follow with rates already in negative territory.

Governor Carney said earlier today that the Bank of England would take steps needed to battle the virus shock. Carney hinted at the complexity of dealing with the trauma for central banks in assessing whether the impact falls on demand — which they have more capacity to address — or supply — which is harder to for central banks to treat.

G-7 finance chiefs and central bankers are scheduled to have a rare conference call today.

With election tensions running strong in the US–after all, today is Super Tuesday–it’s easy to imagine that this move by the Fed is as much political as economic. It comes amid public pressure for a rate cut by President Trump. Moreover, following today’s dramatic move, the president called for more, demanding in a tweet that the Fed “must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA.” 

Politicizing the Fed is dangerous and reduces the global credibility of the US central bank.

Stock markets around the world reversed some of today’s earlier losses on the news. The US stock markets opened today with a significant selloff following a rally yesterday. Bond yields continued to decline on the news.

Bottom Line for Canada: The key government of Canada 5-year bond yield has fallen sharply today to 0.925% and falling at the time of this writing. The 5-year yield was 1.04% before the Fed’s announcement. The Bank of Canada will likely cut overnight rates tomorrow for the first time since October 2018–but by how much? I would guess by 25 bps given Poloz’s concern about household debt.

–DR. SHERRY COOPER