A weak jobs report can make a homeowner start mentally spending the mortgage savings before the Bank of Canada has done anything.
Unfortunately, mortgages don’t work quite that quickly.
Canada’s September jobs report arrives October 9. Employment weakness could increase expectations for lower rates, but the effect on a mortgage depends heavily on whether the borrower has a fixed or variable loan. That difference can be worth real money.
Source: Getty Images
Two roads to your payment
Variable-rate mortgages are generally more directly influenced by lenders’ prime rates, which move closely with the Bank of Canada’s policy rate. Fixed mortgage rates tend to respond more to bond yields and lender funding costs.
Those markets can change before the central bank does. That means a weak jobs report could push some fixed rates lower even without an immediate Bank of Canada cut. Persistent inflation could also keep borrowing costs elevated despite softer employment.
So I’d compare actual mortgage offers instead of mentally depositing a forecast.
What a quarter-point does
Consider a $500,000 mortgage with 25 years remaining. Dropping from 4.50% to 4.25% saves about $69 a month. Reaching 4% saves roughly $137.
| ILLUSTRATIVE FIXED RATE | MONTHLY PAYMENT |
|---|---|
| 4.50% | $2,767 |
| 4.25% | $2,698 |
| 4.00% | $2,630 |
Useful? Absolutely. Enough to justify delaying a renewal indefinitely while trying to outsmart the bond market? Much less obvious.
Borrowers should also compare prepayment privileges, portability and break penalties. A tiny rate advantage can vanish very quickly if the mortgage becomes expensive to change. Investors can look at the same environment from the lender’s side.
A different Canadian bank
EQB ( TSX: EQB), owner of Equitable Bank and EQ Bank, has substantial mortgage exposure along with deposits and a growing consumer-finance operation. Lower mortgage rates could help borrowers; that said, they don’t magically erase credit losses.
Third-quarter adjusted earnings per share (EPS) was $2.12, but provisions for credit losses climbed to $83.9 million, up 147% year over year, partly reflecting its acquired credit-card business and pressure elsewhere in lending. That’s the number I’d watch if the labour market deteriorates.
EQB’s CET1 ratio stood at 13.4%, providing a useful capital cushion. At $123.78 versus book value of $86.86, investors are paying roughly 1.4 times book value. So anyone buying stocks in Canada is paying for earnings growth beyond the equity already sitting on the balance sheet.
Don’t confuse borrower relief with bank profit
A weaker economy can lower rates and increase defaults at the same time. That’s why I wouldn’t buy EQB simply because Friday’s employment number disappoints.
Its growing digital banking and consumer-finance businesses can eventually broaden earnings, but credit performance needs to cooperate.
Among Canadian bank stocks, EQB offers more growth potential than some larger peers and more execution risk alongside it.
Bottom line
For borrowers, Friday’s jobs report matters only after it changes the mortgage offers actually available. For investors, lower rates are only useful if customers keep paying.
I’d watch EQB’s credit provisions and integration progress over the next few quarters. If losses stabilize while earnings recover, the same weak economy pressuring mortgage rates could eventually create a more attractive entry point.
