This spring’s housing market in Canada may see more activity than usual if other big lenders follow TD Bank’s lead in lowering its posted five-year fixed mortgage rate, according to mortgage expert Rob McLister.
“People often ask: ‘Who cares about the five-year fixed posted rate?’ And the fact is that it’s a very essential component to the stress test, which is a key factor in determining housing demand,” said McLister, the founder of mortgage comparison website RateSpy.com, in an interview on BNN Bloomberg Tuesday.
“If we get a few more banks matching that rate, what it’ll do is lower the stress test rate, which is what is used to determine how much mortgage you can qualify for by about 20 basis points. And that will improve a typical borrower’s ability to buy a home by about two per cent.”
TD cut its posted five-year mortgage rate from 5.34 per cent to 4.99 per cent on Tuesday to narrow the gap between the benchmark and the special rates it offers customers. The bank's customer, or "special" rate, stands at 3.09 per cent, or 3.11 per cent with annual carrying fees included.
Banks maintain an official posted rate, but also offer lower rates either directly or through brokers and other channels that better reflect market conditions.
McLister said if other Canadian lenders follow TD’s lead in the near-term, it could spur more activity in the spring housing market.
“The spring market accounts for a disproportionately large percentage of home sales,” McLister said. “It’s prime time in the mortgage market and this change by TD, if it’s matched in short order, is going to make for a more action-packed spring market.”
“It’s not necessarily how much extra you can qualify for, but it’s more the psychology,” he added.
TD's rate drop comes after the five-year government bond yield, which helps determine mortgage rates, declined from 1.70 per cent in mid-December to 1.34 on Monday, in part on economic fears around the recent coronavirus outbreak.
The rate also saw a steady decline for much of last year before a late rebound. The five-year bond yield dropped from 1.93 per cent in January last year to 1.13 in September on several factors including the U.S. Federal Reserve’s rate cuts which pushed mortgage rates lower and helped boost real estate sales in the latter half of the year.
With files from The Canadian Press