It looked like a puzzle: As the COVID-19 pandemic spread, central banks—including the Bank of Canada—quickly cut interest rates to cushion the blow. But rates on new mortgages didn’t decline much, and some actually went up. Why?
Remember that your lender’s funding cost determines most of the mortgage rate. The cost of funding jumped in the early days of the pandemic as investors became nervous. Many simply wanted to hold on to their cash given how uncertain everything was. So, the funding that is normally easy for lenders to get slowed to a trickle. This drove up the funding cost, even as the Bank of Canada’s policy interest rate fell.
The Bank of Canada has taken many steps to help financial markets work better during the pandemic, along with the federal government and other public authorities. The goal is to ease strains in funding markets, so lenders can keep supplying credit to households and businesses.
These steps include launching programs to make sure lenders can access the funding they need. As a result of these actions, funding costs fell and some mortgage rates on new loans started to decline.
Keep in mind: existing mortgages didn’t become more expensive during the pandemic. They either have an interest rate that is fixed until its next renewal, or a variable interest rate that declined along with the Bank of Canada policy rate.