Fed govt, BIG SIX BANK’s pushed us into Fixed rates!…part 2 of 2.

IT’S NO COINCIDENCE THAT THE BIG SIX BANKS CONTINUE TO REPORT RECORD PROFITS.

The Bankers were onto something.  Now if they could only keep Variable rate pricing higher or make it tougher to get a Variable rate mortgage…. In 2010, the Fed govt would help increase those Bank profits…All new Variable rate mortgage borrowers would need to qualify at the Bank posted 5 year fixed rate.   The Feds said they had to tighten Mortgage Lending Rules… They had to make it tougher to qualify for a mortgage with fluctuating interest rates to ensure we would not have a ‘housing bubble’ and a ‘mortgage default problem’…  This pushed out 5% more borrowers from qualifying for, and benefiting from Variable rates.  And by the way, at that time, Variable rates ranged anywhere from 1.50% to 1.95% compared with the best discounted 5 yr fixed rate of 3.89%…..!  Anyone seeing a pattern here?   (Some stats to remember…Mortgage defaults have been under 0.50% for over 15 years are currently at around 0.33%… this is at or near record lows!!… so where’s the problem??)

This is also when the BIG SIX BANK’S inflated, and unfair mortgage penalty calculation came to light.   The lower rates became, the higher mortgage penalties climbed…  $10,000, $20,000, $30,000 in mortgage prepayment penalty charges were popping up in mortgage blogs and news sites.   Even the media had to jump in and cover some of this…  And when Canadians needed a break in their mortgage payments, they were left out in the cold.   These inflated penalties made it impossible to get out of their higher Fixed rate mortgages without paying an enormous penalty.

The most pathetic part about all this…. ?  If these borrowers had their mortgage with any one of a number of other Lenders that used the FAIR prepayment penalty calculation, they would have SAVED $THOUSANDS!!!! (and there are a number of these other Lenders throughout Canada to choose from)…  These BANK clients could probably have benefited from the new lower rates.

Meanwhile, we kept seeing all of the BIG SIX BANKS report profits during a time when the rest of the world banks were reporting losses.   And even today, we are seeing record profits being reported…  A combined $30billion profit in 2012 by the BIG SIX!! (5 of the top 8 most profitable corporations in Canada are BANKS!!!)

THE BOY WHO CRIED WOLF, OR SHOULD I SAY ‘HIGHER RATES ARE COMING’.

Over the past 3 years, the Bank of Canada has warned about an imminent interest rate hike…. it’s coming soon… real soon… really soon, I mean really, really soon!!   In mid 2010, a few non-bank Lenders led the way with some very attractive Variable rate pricing…. they found a way to offer a very attractive Prime less 0.75%...  For me, it was very clear that Variable rate was again, the product of choice…. but that didn’t last long.

Less than a year later, in the Spring and Summer of 2011, the Banks got together and jacked up Variable rate pricing again… Variable rate pricing went from Prime less 0.75% to just Prime… We still haven’t been given any real explanation as to why?  Except that CIBC started it in the Spring of 2011 and the rest of the Banks followed by August 2011.  Very little or no media coverage as to why this happened… Our sources tell us it was purely profit driven……   This made Variable rate a less attractive option when faced with the option of having to commit to a 5 year term at that price.

This year, more history was made.  5 year Fixed rates approached Variable rate prices.   Gone, was my minimum 1.00% spread between Fixed and Variable.     With 5 year fixed rates at 2.99% and the Best Variable rate at Prime less 0.35% (3.00% – 0.35% = 2.65%), it’s really difficult to choose Variable rate over Fixed.   For the first time, I am recommending Fixed rates to most of my clients.  At least while Variable rate pricing remains where it is.  The spread is just too close to Variable…This is really one of those rare moments in history when we have to look at 5 yr Fixed rates.

STAY AWAY FROM THE BIG SIX BANKS FOR FIXED RATE MORTGAGES

Did the BIG SIX BANKS and Fed govt win?   Did they finally get their way to force us all into the more profitable 5 year fixed rate mortgage?   Maybe, for now….but I think Canadians are also winning. 5 year fixed rates are available through Mortgage Brokers at 2.99%, without pulling teeth.    More Canadians are using Mortgage Brokers than ever before to save money…  In 2012, 47% of Canadians used a Mortgage Broker to get their mortgage.   This increased competition has forced the BIG SIX BANKS to become more competitive…  Posted BANK 5 yr fixed rates are 5.24% and their discounted rates are at around 3.39%… That’s almost a 2.00% discount… We’ve never seen that before!  (Mortgage Brokers still have better advertised rates).

Still, the BIG SIX BANKS haven’t changed their unfair penalty calculations…. They rarely, if ever, offer you their best rate up front.  There are better mortgage products available elsewhere… with better advertised rates, better terms and condition and better prepayment penalty formulas..   Some of the BANKS are now registering collateral mortgages (I’ve had some clients not even know they were in a collateral mortgage).  So how or why would I recommend anyone go to the BIG SIX BANKS for a mortgage?  (long pause)  I can’t think of any reason either…..   .

Getting a mortgage today?  Speak with a Mortgage Broker…and think twice about sticking with your BANK…. you could just save yourself $thousands.

As always, I welcome your comments and questions.  Let me know if I can help.

Steve Garganis 416 224 0114 steve@mortgagenow.ca