Tuesday was a long day.
And I don’t mean because of the incessant media coverage on everything from Coronavirus to….well, actually, that’s all the media coverage is about these days.
No, my day was long because I find myself at home more often, and I had absolutely no idea how hard a job being a parent actually was.
I was in the office from 9am to 2pm, and from 2pm to 6:30pm, I swear, it felt like a full day. That’s crazy thing! Standing outside at 5pm, being tired as hell and wondering how my 3-year-old has such incredible energy, I would have sworn I had just put in a full day with the kid. But no, in fact, it was merely three hours. And by God, was I already looking forward to bed.
I’ve heard some people say that this “forced vacation” has its upsides. Staying home, chilling out, watching Netflix, reading that book or taking that course that you could never find the time for. Well, I’m of the opinion that it’s ten times more work to find things to do with kids all day than it is to do your job. Any job.
Good lord, let me get back to work…
I received an email on Tuesday from a morning show that wants me back on this Friday to answer some questions about the Coronavirus and the impact its having, or may have, on real estate. Just from the email alone, I could tell there’s a lot of misinformation floating around out there. And we know what misinformation can do, right? Just think “Donald Trump” and “drinking aquarium cleaner.”
There are a slew of ways in which misinformation is floating around out there, pertaining to real estate, but there are two that I want to comment on today:
1) Mortgage Deferrals
2) Mortgage Rates
Last Friday, we first started seeing articles pop up about mortgage deferrals.
The world is changing rapidly with every passing day, and each and every day, we cross a bridge that we never thought we would.
Mortgage deferrals? Really? Are we expecting things to get that bad out there?
Yes, it would seem. All five of the major banks are set to offer some sort of deferral option.
But as usual, a large percentage of the unwashed general public (ie. not those who comment on this blog) merely read one headline or see one phrase that piques their interest, and that’s it, they’ve come to the conclusion they like most.
The qualification criteria for a mortgage deferral is still unclear, but I would like to think I’m sophisticated and cynical enough to offer the following:
Banks are in business to make money.
Banks primarily make money by lending money to others.
Banks do not own real estate as their primary source of revenue.
Ergo, ceasing to lend money, and beginning to own real estate is not something the banks want to start doing, in droves, in 2020.
Make no mistake, the banks don’t want mortgage defaults, and they don’t want borrowers to fall behind on their payments. Banks are completely and utterly uninterested in foreclosing and taking over houses and condos.
So what’s the best way to get out ahead of that? Offer mortgage deferrals.
They’re not doing this because they, like Labatt making hand sanitizer instead of beer, want to help Canadians. The banks are doing this because they’re guarding against the worst case scenario.
Now, for the perennial headline-reader, who doesn’t feel the need to dive any deeper into a story once the words “Chinese virus” are strewn across the footer of a Fox News broadcast, we must distinguish between “banks to offer mortgage deferrals” and “banks to offer mortgage deferrals to everybody, everywhere.” Because unfortunately, this is what I’m hearing about from a lot of people.
Somewhere out there, right now, is a person who pays $2,400 per month on their mortgage, who believes that, despite being gainfully-employed, and having $38,000 in savings, that he or she will simply stop paying their monthly mortgage.
Is it really going to be that simple?
Would the Big-5 banks, who each make about $1 Billion per month, allow little ole’ Jannie or Jimmie game the system?
Not a chance!
There’s no way in the world this is going to happen, and yet it’s all anybody wants to talk about. Bear in mind – the people who comment on this blog do not represent the ‘average’ person on the street. You guys are way ahead of this, but you’re smart. Most people out there, in today’s society, are not.
But click on a link, read the headline of a newspaper story, or just talk to the person bagging your groceries with a mask and gloves, and you’ll hear that banks are, in some cases, forgiving mortgages!
How did we go from “deferral” to “forgiveness?”
No word of a lie, that’s the email I received from a reader today. Okay, fine, it was only one instance, but in this era of misinformation, one is enough for me to think there are more.
The biggest problem that I have with this idea of mortgage deferrals is not that people are spreading misinformation, but rather that they’re believing it.
I truly believe that once the proverbial dust settles on this week and next, and the Big-5 banks roll out their “plans” to deal with possible late mortgage payments, we’re going to find that VERY few borrowers will actually qualify for deferrals.
If you’ve got a $2,000 mortgage payment, and you’ve got another $4,000 floating around out there somewhere, I don’t think the bank is going to let you off the hook.
The second topic that is prone to an absurd amount of misinformation is that of mortgage rates.
And the problem stems from the following: most people don’t understand, or refuse to learn, the difference between “interest rates” and “mortgage rates.”
I’ve heard, over and over again, that “rates are low.”
I’ve heard, “the banks are dropping rates close to zero.”
This couldn’t be further from the truth, however.
I asked my mortgage broker, Tony Della Sciucca, to weigh in with his thoughts on this:
To say that we are living in unprecedented times would be an understatement. COVID-19 continues wreaking havoc on the global financial markets, but most importantly our health, safety and well-being.
The uncertainty and anxiety of the virus is causing panic in worldwide markets as the majority of share prices plummet, slowly eroding any savings that we may have accumulated over the years.
In a span of ten days;
- Bank of Canada (BoC) makes an emergency rate cut, lowering its target for the overnight rate by 50 basis points to 0.75 per cent. As a result, prime lending rate has dropped one full percentage point from 3.95% to 2.95%.
- Fixed interest rates plummeted, hitting record lows of 2.49% (5yr fixed – uninsured), only to see them sharply increase again to 3.24% (5yr fixed – uninsured) in the last 72 hours with Scotia leading the pack. A swing of 75 basis points.
- And, if that wasn’t enough, Canada’s major banks will allow (on a case by case basis) mortgage payment deferrals for those hit hardest by COVID-19.
The public are often mislead by the term “Bank of Canada lowered its overnight target rate to 0.75%”. Some are under the impression that fixed and variable interest rates are now 0.75%.
That’s simply not the case.
To clarify, The “overnight rate” is the interest rate at which major financial institutions borrow and lend one-day (or “overnight”) funds among themselves.
Those funds are then passed on by the banks in the form of credit to the consumer/borrower in the form of “Prime Lending Rate” (currently at 2.95%) and is often expressed in a percentage above or below prime rate.
Keep in mind that variable rate mortgage can be subject to rate fluctuations given that the overnight target rate can also change.
See link below for historical changes to the Policy Interest Rate.
When it comes to variable rate mortgages, banks have historically offered discounts to prime rate in order to incentivize borrowers to assume the risks associated with the fluctuation of the prime lending rate. In today’s world, that’s not the case.
Currently, variable rate mortgages are priced at; prime + 0.05% – 0.10% by most financial institutions.
Which begs the question, particularly in a low interest rate environment, If banks are not offering a discount to prime rate, why would a borrower assume the risk, especially when fixed interest rates are currently cheaper?
Personally, to even consider a variable rate mortgage, I would need to see banks offer prime minus 0.75% to 1% to make this a consideration.
So, are the banks really that greedy? Is COVID-19 causing a real liquidity concern for our major banks?
When it comes to fixed interest rates, they work a little differently.
Unlike variable rate mortgages which are hedged against the prime lending rate, fixed interest rates are tied (indirectly) to Government bond yields. Simply put, when government bond yields increase, fixed interest rates will typically rise and conversely the opposite.
Fixed rates can be subject to change on a daily, weekly or even monthly basis. Have a look at the link below at some of the bond market movements in the last 12 months. https://www.bankofcanada.ca/rates/interest-rates/canadian-bonds/.
At the request of Federal Finance Minister Bill Morneau, banks have agreed to defer up to 6 months of mortgage payments for individuals that qualify, specifically those who have lost their job, along with small business owners.
Each bank has their own criteria as to who qualifies and how those payments are being deferred. If you’re concerned about your ability to make mortgage payments during these times, it’s best you speak with your financial institution to see if/how you qualify. Allow yourself some time as wait times have been in excess of 3 hours for some people.
On a personal note, if COVID-19 has taught me anything, it’s that we’re all vulnerable in some way or another. The impact of the virus has left many of us concerned about; our employment, our health, our families and friends and our finances.
Now more than even we are being called upon to help our fellow neighbours in this time of need and uncertainty. Let’s give it our best!
Stay safe, my friends!
Tony Della Sciucca
Mortgage Agent, FSCO Lic: #12214
Dominion Lending Centres
Like I said, the basic understanding of both “interest rates” and “mortgage rates” is needed to see just how wrong people are about the current mortgage rate environment.
Tony raises a good point about the banks’ reason for the increase in rates. Is it, in fact, greed? Or is this corporate responsibility, ie. answering to shareholders who want a return?
There’s a tremendous amount of irony in that. Banks need to lend money at rates designed to bring in revenue, in order to provide dividends to investors, and to see a rise in stock price. But almost all of these investors/shareholders also have mortgages…
On Friday, I’m going to show you what’s happened to showings in the past two weeks, since, as you probably would have guessed, they’ve fallen off dramatically.
I’ll also take a look at the listings that were “holding offers” last week and see what sold, and what didn’t.