The Bank of Canada’s (BoC) surprising January cut in the overnight lending rate to 0.75 per cent from one per cent could be the beginning of more BoC cuts to the benchmark interest rate.
Vancouver mortgage broker Peter Kinch and others believe economic uncertainty triggered by slumping oil prices could drop lending rates to unprecedented lows.
“I think we will see another Bank of Canada rate cut in March,” said Kinch, a mortgage consultant with Dominion Lending Centres.
He predicts the BoC will reduce its overnight lending rate to 0.5 per cent on March 4, the date of the next BoC rate announcement. That, Kinch said, could result in variable lending rates for residential mortgages of 1.9 per cent — “the lowest any of us have ever seen.”
As well, yields on Canadian bonds, which are tied to long-term mortgage rates, are at near-historic lows. Kinch said this could drive five-year mortgage rates down to 2.6 per cent compared with current rates in the 4.6 per cent range.
“These are absolutely record low mortgage rates.”
Kinch is not alone in expecting a rate decline.
TD Bank is predicting a further 25-basis-point cut in the BoC’s rate in March. HSBC Bank PLC has predicted the BoC will lower its overnight target rate to 0.5 per cent next month and again in the second quarter to 0.25 per cent.
Even BoC governor Stephen Poloz has hinted at further rate reductions. Poloz said recently that low oil prices were “unambiguously negative” for the Canadian economy and that the central bank can “take out extra insurance,” which analysts say signals further rate cuts.
The lower rates have “been a game-changer” in the commercial real estate market, particularly in the multi-family rental sector, said commercial mortgage broker Michael Lee of Mortgage Alliance.
“I have a client buying a multi-family property with five-year financing at 1.77 per cent.”
Lee added that landlords can already secure 10-year mortgages at 2.43 per cent.
Based on the potential returns on Vancouver rental apartments — cap rates are in the 3.5 per cent to four per cent range and the average appreciation of a city apartment building in the past year is 16 per cent — Lee said, “it’s practically like giving away free money.”
As a comparison, the lowest five-year bank rate for first-time homebuyers — at which they must qualify for a mortgage — is 4.69 per cent, since most major banks trimmed residential loan rates by just 15 basis points following the recent BoC cut.
Multi-family mortgage loans have the lowest commercial rates because landlords can apply for Canada Mortgage and Housing Corp. insurance, which Lee said removes any risk from the lender.
“Generally, lenders have become more aggressive in the commercial real estate market.”
Lee added that investors could even look at medical marijuana facilities for easy financing.
“Believe it or not, if permits are in place and it is all done by the book, financing is available. Lenders know the cash flow will definitely be there.”
Lee said that one of his residential clients, having problems securing a $1.5 million mortgage on a Vancouver house purchase, is considering buying a small apartment building instead because it’s so much easier to achieve favourable financing.
Mortgage broker Kyle Green, of Mortgage Alliance in Vancouver, estimates that for about 10 per cent of residential borrowers, rate cuts are not the issue: it’s trying to get financing at all.
“It is very difficult to get a home mortgage loan [at a major bank] if you don’t have qualifying income.”
Green said this would include such borrowers as self-employed people, new immigrants and those on fixed incomes, such as retirees or those tapping trust funds.
Unlike commercial lending, residential loans are based more on qualifying the borrower than on the property, he said.
In a bid to cool a white-hot housing market, Green said the federal finance ministry has been tightening regulations on residential loan approvals.
“Banks are being audited consistently by the federal government, and if a [residential] borrower doesn’t fit into the boxes, they won’t get a loan.”
Note: This story first appeared in our sister publication Business in Vancouver. To read the original story go here. For more business news go to biv.com
