Mortgage lenders cut borrowing rates but is it good news?

The Big Five banks have reacted to the BoC’s decision to cut interest rates to 0.5 per cent, but as expected they haven’t passed the whole amount on to borrowers.

TD Bank made its cut just 12 minutes after the rate decision was announced. It reduced its prime lending rate by 0.10 per cent to 2.75 per cent, but it had to make a further cut later as its rivals opted to cut 0.15 per cent to 2.70 per cent.

Analysts are uncertain that the lower rates will mean more Canadians deciding to become first-time buyers; mortgage rates are already at historic lows and are unlikely to fall much if at all, although the talk of cheaper borrowing may be enough to boost interest.

The BoC took a calculated risk in cutting rates as it could fuel home prices in some already overheated markets. Coupled with the downward effect on the Canadian dollar it has the potential to make housing more attractive to foreign investors and tighten affordability for domestic buyers.

Some analysts are also concerned that new or existing borrowers may feel overconfident that mortgage rates will stay low while interest rates do but the tracking of government bond yields, which are already rising, could increase the cost of some home loans long before interest rates rise again. That could potentially mean that homeowners will struggle to make payments and ultimately lead to a housing correction. 

TD Bank economist Diana Petramala told the Globe and Mail: “We do think that eventually the economic conditions are going to catch up to the housing market and we’ll see a bit of an unwinding of recent strength over the second half of the year, even with the cut in interest rates.”

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