Canadian Mortgage Market – Government to Buy $50 Billion in Residential Mortgages

In an effort to loosen up the tough financial markets the Governement of Canada has announced they will be buying $50 Billion in residential mortgages from the banks. The move is done in an effort to privide some cash and liquidity to banks that, while certainly not facing the strains of other contrys’ banks, have tightened up guidelines and rates such that markets across the country are suffering.

By providing banks with money, it isn’t just providing profits. Instead, it will free up money for other uses such as student loans, lines of credit, car loans, business loans, etc… Banks have been so tight in the past two months that getting money for anything OTHER than a residential mortgage has been very difficult.

This move will effectively triple the amount of insured mortgages that Ottawa can buy from the banks. They also set up a funding facility that will make it cheaper to use government insurance which would guarantee bank borrowing. The lending facility provides Canadian banks with cheaper funds by knocking .25% off the commercial term borrowing rate to the banks, and waiving the 0.25% surcharge “until further notice.”

Said Flaherty, Finance Minister, “it is an efficient, cost-effective and safe way to support lending in Canada at a time of extraordinary strain in the global credit markets.” Further, “our goal in all of this is to support the availability of credit to Canadian consumers and businesses to foster economic growth.”

Also on Wednesday, the government said it will inject $8 BIllion in the country’s tight money market under new liberal terms. The new Canadian-dollar term loan facility will be conducted by auction in $2 Billion dollar blocks whereby banks can offer any non-mortgage loans as collateral.

All of this is good news for Canadian borrowers and banks, and we can likely expect to see the cost of funds for banks fall and thus the rates on variable money with them. Already, there are rumblings in the industry that variable rate discounts (currently prime PLUS 1%) may go to prime PLUS 0.60% or better. Finally, some relief is in sight.

~ by merc359 on November 16, 2008.