New Mortgage Rules - How does that affect our GIC investments | General financial discussion | Discussion forum

Short answer: Probably not much, at least in the short- to medium-term. Banks rely a lot on "wholesale funding," which can include sales of debentures, preferred shares, GICs, non-viable "principal at-risk" notes and other means to mainly institutional investors. They also securitize their loans off balance sheet, but provide guarantees they'll take back those loans should they run in to trouble, with various securitization vehicles and through the bond market. This largely drives mortgage rates than any central bank action. The banks will probably raise mortgage rates first through the increased rates in the bond market, to prevent further spread compression. They could, potentially, tap their more "old school" retail deposits more for funding but only if it gets more expensive than the bond and wholesale funding market/measures as retail deposits are typically more expensive.

That said, if the moves by the Minister of Finance, particularly the ones on the higher qualification rate and changes to bulk portfolio insurance (whereby a bank essentially pays the CMHC premium itself to insure a mortgage that has more than 20% down, to reduce the risk of its mortgage portfolio - yes, they can and do do that!), reduce the qualification ability for mortgages, that will likely further reduce for demand for mortgages and, thereby, reduce the banks needs to raise more funding, either through retail deposits or wholesale funding. Also, the changes to "cool the housing market," may have finally be the changes to do just that, many (including mortgage brokers and non-bank lenders) are suggesting. As a result, this gives the Bank of Canada to provide further monetary stimulus with rate cuts. I might be a bit of a contrarian, but I am now predicting the Bank of Canada will lower the overnight lending rate a full 50 bps to 0% by the end of 2017, with about a 30-35% chance that a 25 bps cut could come as early as its meeting this week or before the end of 2016. This would allow the banks to cut deposit rates 25-50 bps, which would like see the "Big 5" "go to 0%" on all its accounts and the highest posted rate go to 1.25%.

This ended up being a longer answer than I'd intended but, basically, deposit rates could go up if all of the following occurs: (1) economic growth nationally goes to 2.5%-3% (or higher); (2) the recent mortgage rule changes persist and aren't rolled back; (3) the City of Vancouver (and possibly others) implement their forthcoming vacant home/condo tax in every month the property remains vacant or unoccupied; (4) the Bank of Canada doesn't cut rates or engage in quantitative easing or "helicopter money" and, most importantly, (5) the wholesale funding method and bond market become and remain more expensive than retail deposits.

My prediction: things stay the same for 3-6 months in terms of rates, the bond market dictates slightly elevated mortgage rates given the higher risk premium on the banks and growth remains tepid. With 12-24 months, I expect deposit "posted" rates to fall further.

Cheers,
Doug