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...
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Source: The Globe and Mail - By TAMSIN MCMAHON
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