On April 14, I attended the annual Independent Mortgage Brokers Association (IMBA) annual conference. We were fortunate to have Canada Mortgage and Housing Corporation’s (CMHC) Regional Economist, Ted Tsiakopoulos, share his outlook on the economy, real estate and interest rates.
Click here for the entire presentation. This is a summary of CMHC’s outlook:
- No evidence of housing bubble.
- housing market is stabilizing in Ontario.
- we won’t see the growth in prices as in years past.
- this outlook is still uncertain given all the global events, both political and economic.
- credit growth is slowing.
- Interest rates will rise as economy improves.
The good news is that there doesn’t seem to be a housing bubble. Interest rates will gradually return to normal. And we don’t seem to be taking on as much personal debt as the government and media has led up to believe in the recent months.
This week, we saw two major mortgage lenders raise their Variable rate pricing from Prime less 0.75% to Prime less 0.65% and Prime less 0.50%…
This is really quite unexpected…. We cannot ignore what is happening… The explanation given for the prices changes is ‘profitability concerns’. But the cost of Variable Rate funds hasn’t really changed. We believe there are a few other possible explanations.
First, we are seeing more borrowers flock to Variable rate mortgages again…. With a 2.20% difference between a 5 year fixed rate and a Variable rate, it’s been much easier to choose to Variable. Banks make more money on 5 year fixed rate mortgages and would rather push you into these products…. And yet another reason is the possible gains in the recent polls by the NDP.
According to this article in the Globe and Mail, we should brace ourselves for more costly mortgages if the NDP keeps moving in the polls. Here’s a quote from the article that says it well, “This interest rate premium on social democratic governments is unfair and tragic. But dismissing it is unrealistic.”
We don’t normally get involved in politics on this site… not unless it can affect mortgage rates, the housing market or the economy…One of the more infamous examples was in 1995 during the Quebec Referendum. Does anyone remember that?
Just before the referendum, a new poll had suggested that Quebecers’ could win a majority vote to separate. This sent the Canadian stock market and the Canadian dollar plunging. You might also remember that the Bank of Canada rate jumped 1.00% over night along with mortgage rates. It’s the single biggest increase that we have ever seen. It forced many of us to lock into a 5 year fixed rate… (something the Banks loved as the 5 year fixed rate product is the most profitable).
I’m not saying this will happen again but there was a report in The National Post that says BMO put out a warning to investors that things could be shaky if Jack Layton and the NDP continue to gain ground in the polls.
Another recent development this week is that a few major Lenders have increased their rates on new Variable rate mortgages. We have seen them go from Prime less 0.75% to Prime less 0.50%. They say it’s due to profitability pressures…. but I wonder if has more to do with the election next week?
The old Cashback mortgages
As a general rule, cashback mortgage offers have never really worked to the benefit of the borrower. The Banks loves it when a borrower takes one of these deals because it costs the borrower more, earning a higher profit for the Bank.
A cashback mortgage is easy to understand…. The Bank will usually give you Posted Bank Rates with some cash back on closing… The cash back is depends on the term of the mortgage but it’s usually been between 2% and 5.5% of the mortgage balance.
If you have a $250,000 mortgage, the thought of getting $5,000 to $13,750 back in cash on closing sounds pretty good… But let’s take a closer look…
If you do the math, this usually works out to around a 0.60% to 1.10% discount off Posted Rates. Today’s posted 5 year fixed is 5.69%… that would give you an effective fixed rate of around 4.59% at best… Compare this with today’s wholesale discounted fixed rates of 4.19% and the REAL cost of getting that 5.5% cashback means you will pay $4,767 more over the 5 year term.
The New cashback mortgages
Recently, we came across an interesting offer from one of the major Lenders…. Thought we’d share the details…
-5 year fixed rate of 4.29% with a 2% cashback for mortgages under $400k gives an effective rate of 3.89%…and 3% cashback for mortgages over $400k gives an effective rate of 3.69%.
-5 year variable rate of Prime less 0.50% with a 2% cashback for mortgages under $400k gives and effective rate of Prime less 0.90%.. and a 3% cashback for mortgages over $400k gives and effective rate of Prime less 1.10%
Note: if you were to apply the cashback at the time of closing, the effective rates would be even lower.
There is a catch…These cashback offers are only available for mortgage refinances or transfers from other financial institutions… they are not available for purchases (we don’t understand why but that’s the deal)… AND you CANNOT pay these out early with giving back the entire cashback to the Lender…It is also a little harder to qualify for these products and the approval process is a much more involved and time consuming… You will definitely want your broker to be involved in helping processing the approval… (don’t be surprised if your broker has to charge you a small fee for their time…it will still be well worth it.)
I must say, even with these limitations, it may still be worth considering. It’s good to see some more competition in this segment of the mortgage market.
Last week, an RBC Mortgage Specialist decided she needed to degrade Mortgage Brokers in order to get more business… Her marketing piece caught the attention of Mortgage Broker around the country… Her attempts to discredit Brokers backfired… BIG TIME! The broker community was in an uproar and an apology had to be issued by RBC.
This apology was issued by RBC’s Public Affairs Advisor…. Let’s give some credit to RBC for issuing a public apology ….. (pausing for 2 seconds….) Ok, that’s about all the credit I want to give…. It falls short of hitting mark. The wording is weak and I do not find the content to be sincere. Why hasn’t that RBC Mortgage Rep apologized? (I won’t call her a ‘Mortgage Specialist’ anymore as it’s not an accurate description of her duties) Where is she? Did they fire her?
RBC has been paying their Mortgage reps a commission for years.. and it’s based on the mortgage volume, the term and the RATE.. yes, RATE… if the Mortgage Rep sells you a higher rate, they get paid more…
HOW TO BE A MORTGAGE BROKER WITHOUT BEING A BROKER
But here’s another little known secret.. Back in the early 2000’s, RBC created the Alternative Mortgage Solutions (AMS). This department would take declined mortgage applications and broker them to secondary Lenders like Home Trust, Equitable Trust and other institutional Lenders or Private Lenders… The intention was to retain as much client business as possible while also generating a new source of revenue.
The AMS is paid a referral fee from the secondary Lending institution and or charges a fee. That’s right.. they charge a fee!! And you guessed it, the Mortgage Rep is compensated at the end of the day based on the fees earned on the mortgage…. Effectively, RBC is brokering mortgages without being a broker…. Let’s give credit where it’s due.. they have become a mortgage brokerage without having to follow the strict regulations and guidelines of becoming a broker.
Can you say ” double standard”?
If you are an ‘AAA’ borrower, RBC can only offer you their own products, and if you don’t qualify they will broker out your application to their list of secondary Lenders… So who has the better product selection? … A mortgage broker that deals with dozens of ‘AAA’ Lenders and ‘B’ Lenders and ‘C’ Lenders, or with one Bank that can only offer you a limited product selection?
Maybe some good has come out of this mess after all…. Disclosure and knowledge.