September 20, 2020

Mortgage Spreads at 3-Year High

Frederic Tomesco and Chris Fournier, ©2012 Bloomberg News

Jan. 9 (Bloomberg) — Mortgage spreads at the widest levels in three years suggest Canadian banks are heeding warnings from the Bank of Canada that household-debt levels are too high by refraining from passing lower funding costs to consumers.

Canada’s average five-year mortgage rate is 5.29 percent, or 4.04 percentage points more than the 1.25 percent yield on five-year Government of Canada bonds. The spread is almost double its 241 basis-point average of the past two decades, data compiled by Bloomberg show. The gap reached the widest in the last decade at 521 basis points in January 2009.

Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty have warned in recent months against the perils of increased household debt — a trend the central bank said threatens the economic recovery because homeowners may struggle to repay what they owe when interest rates rise. Mortgage rates in Canada are close to their lowest point in decades.

“The banks have definitely become a lot more restrictive in terms of their mortgage lending,” Hosen Marjaee, senior managing director for Canadian fixed income at Manulife Asset Management in Toronto, said in a Jan. 6 telephone interview. “It seems they are all gun-shy. That may be responding to some kind of moral suasion by the central bank that this segment of the market is off balance with respect to everything else.”

Canadian banks issue bonds priced off the five-year note, and use that money to issue five-year mortgages. The difference between the cost of borrowing and the rate of return on the mortgages represents the profit for lenders.

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