The spread between bond yields and the Bank of Canada’s index of five-year conventional mortgage rates shrank to 2.68 percentage points on March 4th, from a recent high of about 5.15 in January 2009, according to data compiled by Bloomberg. The current spread means borrowers are paying about one-half of a percentage point less on a five-year fixed mortgage rate than they would otherwise if the gap was at its average.
The tighter spreads reflects the health of Canada’s housing and mortgage market, prompting lenders including Royal Bank and TD Canada Trust to say that consumer banking margins are tightening due to increased competition. Mortgage credit rose 7% in 2010 in Canada, where house prices now exceed their pre-recession peak, unlike in the US, where prices remain depressed from 2008.
“When everyone’s trying to compete for the same loan, that compresses margins within the banks,” said Craig Fehr, a bank analyst at Edward Jones & Co in St. Louis. “Add to that the fact that rates are very low, so if you’re not earning much on the spread side of the business, you try to make it up in volumes.”