As one Spanish bank was left to “junk” status this weekend, and another Germany bank spoke out about refusing to help Europe’s failing economic system during their debt crisis, things pick up here at home. The crisis has investors fleeing the nation across the pond, and this has yields in bonds in Canada at all-time lows. Bonds we know, are directly related to the amount of borrowing and lending Canadian banks will do; and when bonds are low, it means mortgage rates are most likely going to be as well. This is good news for those looking to renew, refinance, or just obtain their first mortgage. But it may not be such good news for those that fear the low bond yields will send us into Mortgage Wars III.
We saw the first two mortgage wars first in January and then again in March, when most of the major banks in Canada dropped their rates on their mortgage packages. Those wars were just recently blamed for some of the drop in profits that the banks have been seeing. But now that bond yields are at their own historical lows of 1.84 per cent, the banks might just be looking to increase their profit margins once again, and the low bond yields will certainly help them do that if they wish.
According to one anonymous analyst, the banks “can absolutely afford to cut mortgage rates again. But factors such as pressure from the federal government will probably lead them to hold off on more rate cuts. But anything’s possible.”
Those warnings have been severe with Finance Minister Jim Flaherty telling the banks that they were being “irresponsible” in their lending practices back in April. At the time, Flaherty warned about the amount of home loans they were handing out – from Sudbury mortgages to Edmonton mortgages.
The possibility of a third mortgage war comes after many changes have already been made to mortgages in Canada. The new governance of the Canadian Mortgage and Housing Corporation by the Office of the Superintendent of Financial Institutions has been working very well to help curb the amount of mortgage insurance being sought after has been very helpful with taming the amount of borrowing being done; as has the new rules applied to mortgages at the beginning of last year.
But new rules and changes can only go so far and, as the Finance Minister pointed out, it comes down to responsible lending and responsible borrowing. Surely he hopes that the new low bond yields won’t undo all the work that has been done to tame the amount of borrowing Canadians are taking on; and that they also won’t send us into Mortgage War III.
