Fed Rate Cut Decision and What it means for Canadian Mortgages

One of the main factors that Canadian Mortgages take their cues from is the U.S. monetary policy. This in one of the reasons why the Fed rate cut would not be helpful to borrowers. Fed decisions usually move the rates in some respect; however, few questions remain.

How many Cuts would be expected?

The Fed were hiking rates just seven months ago. It is hard to grasp how that growth deteriorated in such a short period of time. Meanwhile, the US economic outlook looks favorable. The Fed claimed that trade frictions and weak overseas growths were to blame and not domestic problems. Experts believe that what the Fed is doing is unprecedented. The Market views this as an insurance cut, designed to head off a more severe economic slowdown.

However, the one thing with insurance cuts is that, they are not as aggressive as the cuts made during periods of unemployment or economic crisis. The Fed categorized this move as a ‘mid-cycle adjustment’. The most that economists expect from the Fed at this point is a 25-75 bps of rate easing.

Will Bank of Canada Follow?

According to historical data, there is a high probability that the Bank of Canada will follow if the Fed cuts 1-2 more times. The rate drop reduces the chances that Canadians will see rate normalization anytime soon. Canada’s benchmark 5-year bond yield was up slightly following the Fed’s announcement. This suggested that traders are not too worried that the Fed policy will push rates lower. Additionally, yields offered clues on where Canadian mortgage rates go near term. As for the Bank of Canada, the Fed cut will not change the Bank’s game plan. Canada’s economy remains buoyant enough to deter BoC easing indefinitely.

Moving ahead

A single rate meeting justifies a change in mortgage strategy. The cut was not exception, as it was fully priced into the market.

Here are some quick tips if you are looking for a mortgage:

1.       5-Year Fixed Rates: This can be a decent decision if you are a risk – averse borrower, assuming you get a 15-20 bps discount the variable rates and you can select a fair penalty lender, if there is a chance you might want to renegotiate the mortgage before maturity.

2.       2-year Fixed Rates: At rates around 2.49%, these are still a good alternative to variable rates and you have the flexibility to refinance and port in most cases.

3.       Variable Rates: This is still a good option for borrowers who have a big asset cushion and tolerance for volatility. This can be said mainly due to their historical edge, cheap penalties and ability to ride low rates.

It can be forecasted that in the foreseeable future, fixed rates probably will not drop more until the 5-year yield closes below 1.25%. Variable rates are party dependent on the prime rate and partly on the discount to prime rate. Both prime rate and the discount could remain in neutral for months, assuming the market expectations are correct.