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As bond yields drop, fixed mortgage rates set to follow

Falling bond yields should push fixed-rate mortgage costs lower in the near-term, possibly as early as this week, mortgage industry experts predict.

Yields on five-year Government of Canada bonds - which help determine the price of fixedrate mortgages - have fallen sharply since November, dropping from a recent high of 2.46 per cent on Nov. 8 to 1.86 per cent as of Monday, a decline of more than half a percentage point.

Prices particularly started to dip in late December, hitting a recent low of 1.752 per cent by Jan. 3.

Yet, mortgage prices in Canada have not followed suit, which has led many experts to predict a mortgage-rate decline is imminent.

"We are expecting to see changes this week as people get back to their desks and look at their screens," said James Laird, co-founder of of mortgage tracking firm Ratehub Inc. and president of mortgage brokerage CanWise Financial.

Mr. Laird believes fixed-rate mortgage costs need to drop because five-year Government of Canada bond yields are lower now than they were at any point in 2018, yet featured five-year mortgage rates for most of last year were less than 3 per cent.

Most lenders are currently charging between 3.3 per cent and 4 per cent as their featured fiveyear fixed mortgage rate, which is high in relation to bond yields.

Mr. Laird is now advising people who are shopping for a new fixed-rate mortgage to wait if they can.

"If there's nothing urgent, hang on for a week and check back, and there should be some changes," he recommends.

Mortgage brokers expect alternative lenders to move first because the major banks are typically slower to respond to cut rates, especially in January when there is little demand for mortgages.

Robert McLister, founder of mortgage-rate comparison website, said the Bank of Canada has signalled slower interest rate growth than the market had previously anticipated, and bond yields are falling as a result, but the big banks are never quick to cut mortgage rates and eat into their anticipated profits as a result.

With real estate sales slow in January, he said there is even less pressure for the major lenders to move quickly or risk losing market share.

"Ultimately, somebody is going to fall out of line, and one of the big banks will move and then the other ones will move," he said.

Mortgage rates have fallen in the United States to their lowest level since last spring as longterm bond yields have also declined since the fall, according to the Wall Street Journal. But Canada has not seen the same reaction, which Mr. McLister says is because of weaker competition in the Canadian market, where the big banks dominate the mortgage sector.

"In the U.S. there are thousands of lenders. ... There are consumers here who are paying more because the banks in Canada control the prime mortgage market."

However, Mr. McLister said customers are at little risk of seeing mortgage rates rise if they don't lock in a fixed-rate mortgage now and instead wait to see if rates drop in coming weeks.

Ron Butler, founder of mortgage brokerage firm Butler Mortgage Inc., says he believes the banks will likely be slower to lower mortgage rates than in the past because Canada's banking regulator has imposed higher capital requirements in 2019, which will likely be passed on to consumers as higher fees and interest rates.

He argues the banks likely would have dropped their rates by now under prior market conditions, but the added capital requirements coupled with the slow pace of the real estate market in January is likely delaying their moves.

"The banks have a traditional cycle. They really only want to be highly competitive with each other in the cycle of the year when home buyers buy, because them view them as their most precious customer."

Nonetheless, he also believes some alternative lenders will begin to lower rates as staff get back from the holidays, likely beginning this week.

Mr. Butler predicts the mortgage market will be weak in 2019 because home sales are likely to lag, particularly in the Greater Toronto Area. While the number of homes sold in the GTA fell to 77,426 in 2018, down 16 per cent from 92,263 in 2017, he foresees an even larger drop in 2019, predicting between 58,000 and 65,000 homes will sell this year.

Lenders will face tough competition on pricing, he says.

"I guarantee you this is not a bounce-back year - this is not a year when we're going to recover from 77,000 [sales]. This is going to be a lower year than 2018 ... My prediction is pain."

© The Globe and Mail

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