June, 2019 | from BCREA Economics

The big news in the Canadian mortgage market is the return of sub 3 per cent five-year mortgage rates. The last year of mortgage rate increases has essentially been erased by an acute repricing of bond market expectations. A slowing Canadian economy and rising global trade tensions triggered a sudden change in bond market sentiment late last year, pushing further Bank of Canada rate increases off the table. 

Even though five-year bond yields and five-year contract rates have fallen substantially, the structure of the mortgage stress test allows for limited pass-through to qualifying rates. As currently constituted, the mortgage stress test is the higher of the contract rate plus 2 per cent or the posted five year mortgage rate. The latter has not changed in close to a year despite the drop in five-year bond yields. In fact, the posted rate appears to be divorced from its prior statistical relationship with the five-year bond yield. Our models imply that the five-year posted rate should be 4.84 per cent, rather than the current 5.34 per cent. 

Not only would a lower posted rate help insured buyers to qualify, but it would provide a significant boost to the uninsured market through a lower stress test rate. We anticipate that current low mortgage rates will be around for most of the summer before rising modestly into next year. As for the posted rate for insured borrowers, it would be surprising at this point if the posted rate moved at all.