What the Lending Rate Drop Means For Your Mortgage

On the heels of headlines forecasting ‘inevitable interest rate hikes’ came the announcement of a 0.25% rate reduction to the Bank of Canada’s overnight lending rate.

The majority of Mortgage Brokers found themselves spending the first two work weeks of 2015 calming clients in the face of multiple headlines forecasting interest rate ‘shocks’ ahead. In turn, the past two weeks were spent explaining to variable-rate clients the subtle, yet important difference between the bank of Canada’s Prime rate and their mortgage lenders' ‘Prime’ rate.

Lenders base variable-rate mortgages on what is referred to as their own internal Prime rate. Although historically lenders have moved in lockstep with the Bank of Canada decisions, there was some initial reticence to lower effective interest rates on current variable-rate mortgages and after nearly a week without movement Lenders reduced their internal Prime rate from 3.00 to 2.85% sharing some of the Bank of Canada’s reduction with variable rate mortgage and line of credit holders, but not all of the rate reduction.

One important point is that the Bank of Canada’s Prime rate is specifically NOT used to qualify clients for mortgages. In other words, Canadians do not currently qualify for any more mortgage debt today than they did the day before the rate reduction announcement. Accordingly this reduction in interest rates does not directly strengthen purchasing power for home buyers, and thus should do little to add more fuel to real estate values.

It is further worth noting that, historically, as lenders reduce their own Prime lending rate on variable-rate products, the discounts offered on these products - mortgages, lines of credit, etc . tend to be adjusted upward, negating any potential gains for new mortgage applicants. Existing closed variable-rate discounts will of course continue to be honoured until the end of the client's mortgage term.

In short, although this rate reduction may bode well for clients currently in a variable-rate mortgage, it may not be of significant net benefit for clients applying for a variable-rate product in the coming weeks. Although today we have both deep discounts on variable rate products, and the new lower 2.85% Lender Prime rate. New applicants may have their cake and eat it too.

Fixed rates, although largely dictated by the bond market, have been edging downward since Jan 5. Despite this material and documented decline, there had not been a major headline noting this. Rather headlines were largely promoting the opposite of what was occurring in reality. The day that the Bank of Canada announced the cut of 0.25%, the bond market saw a (then) record low of 0.83% and has since dipped below 0.60%.

This has created significant increases in lenders' fixed-rate profit margins, and arguably calls for further rate reductions to fixed-rate products, in particular the five-year fixed-rate mortgage. However, as with the cut to Prime, lenders have thus far been slow to respond. Offering 0.05% and 0.010% reductions and reaping the increased profits. Lenders remain unlikely to make any significant moves until one breaks ranks. With strong property values coupled with strong sales activity in most major markets, there seems little incentive - or fundamental desire - on the part of lenders to reduce rates further.

What is evident at this time is that variable-rate clients will continue to be the big winners into the foreseeable future, and those clients who prefer a fixed-rate product will also continue to benefit from historic lows as well. 

If you are planning to buy a house in Whitby, Brooklin or other areas within Durham Region, contact me. I can help you with the buying process and refer you to a mortgage specialist that can explain the products and help you choose the right mortgage product.

Randy Miller
Broker of Record
Royal Heritage Realty Ltd.
Offices in Pickering and in Whitby
905-430-1800
randy@randymiller.ca
http://whitbybrooklinhomes.com

Mortgage Rate War

The Globe and Mail reported this week that less than a month after the Bank of Canada’s surprise interest-rate cut, a renewed mortgage-rate war is in full swing. But, this time, it’s being driven by an unlikely source: smaller lenders.

Even as Canada’s big banks have cut rates to near three-year lows, small credit unions and mortgage brokers are going a step further, sacrificing profits in a fierce bid for new business.

Only weeks after the country’s banks began offering eye-popping specials such as 2.84-per-cent five-year fixed mortgages, the average discounted five-year rate offered by the Big Six banks now sits around 2.79 per cent, driving the spread between the bank’s posted rates and the rates that customers actually pay to levels not seen since 2012.

But in a cutthroat move to grow their share of mortgage originations, many smaller lenders and brokers are offering deep discounts off the banks’ already low rates. Several online brokerages are offering variable mortgages with rates below 2 per cent and five-year fixed mortgages as low as 2.39 per cent.

The battle for customers comes after the central bank dropped its benchmark rate last month to 0.75 per cent – and amid speculation of deeper cuts in the months ahead.

Concerns are mounting that low mortgage rates will add fuel to an overheated housing market and add pressure to an economy struggling with rising household debt. Earlier this month, North Peace Savings and Credit Union, a small credit union in extreme northeastern B.C., began advertising a seven-year fixed mortgage at 2.99 per cent, well below comparable offerings from major lenders for the same mortgage term.
The credit union can afford to offer such an attractive long-term rate in part because few people actually take seven-year mortgages and the company’s primary business is commercial lending to the region’s natural gas industry, North Peace chief executive Mitchel Chilcott said.

But the company, whose mortgages are entirely self-funded through deposits from its 12,000 customers, also opts to earn less profit and pay out fewer dividends in order to drive rates down.

In the past, members received cheques for $1,000 roughly 14 months after the start of every fiscal year. But about five years ago the company gradually began shifting toward boosting the rates on its high-interest savings accounts and lowering them on its mortgages.

“For most homeowners, having a $90 or $100 lower mortgage payment a month was a lot more meaningful and impactful than maybe getting money back 14 months later,” Mr. Chilcott said.

Other credit unions have followed a similar model, which has helped them grab more market share away from the banks. Banks lost more than 2 per cent of their share of the mortgage business last year, according to banking industry consultant David McVay, with some of that going to credit unions thanks to increased price competition.

The rate war is even more intense among mortgage brokers, many of whom are shifting away from the traditional full-service model that saw brokers spending hours working with clients to select the best mortgage and earning hefty commissions. These days, more borrowers are turning to online and “self-service” brokerages that compete on volume, offering less personalized service and sacrificing some of the commissions they earn from lenders in order to discount rates even further...

Read the full article: Click HERE! 

Source: The Globe and Mail - By TAMSIN MCMAHON

Are you planning to sell your house and move? I am here to help you find the perfect home for you. Having sold real estate in Whitby and the Durham Region for over 20 years, I can help you with both - the buying and selling process.

Randy Miller
Broker of Record
Royal Heritage Realty Ltd., Brokerage
905-239-4800
randy@randymiller.ca
www.randymiller.ca