Mortgage Rates & Mortgage Broker News in Canada

Variable Mortgage Premiums Shrink

There’s been a noticeable industry-wide reduction in variable rates the past few weeks.  Whereas prime + 0.80% was the norm for a closed variable four weeks ago, today’s variables are available for prime + 0.40%.  If you look hard, or have a good mortgage planner, you might find some even lower.

Interestingly, bankers acceptance (BA) yields have not gone down in that timeframe.  Nor has prime rate.

Instead, it appears that liquidity spreads above BA yields are improving.  (Liquidity spreads represent the extra premium that lenders pay for variable mortgage money.)

There are at least two factors at work here.  Short-term borrowing costs, in general, have improved significantly.  (See this story on the TED spread.)

In addition, lenders with alternative funding sources (like deposits) are currently flush with cash as investors park money in safe accounts.

Each factor is helping lenders generate short-term capital at better rates, which lenders are then passing along to borrowers (some lenders faster than others).

Going forward, unless we get another market shock, variable rates may continue to drift lower.  No one knows if we’ll get back to “prime minus” this year, but variable rates may indeed get closer to prime.

Scotia STEP Now Automatically Readvanceable

Scotia has always had a solid readvanceable mortgage (the STEP), but it’s been plagued by one nagging problem.  Up until recently, you had to manually request a re-advance of credit when you made a principal payment.

No more. 

The Scotia STEP is now automatically readvanceable.  If you pay down $100 in principal (the minimum increment), then Scotia automatically increases your authorized available line of credit by that amount.

This change has been a long time coming and it corrects the biggest fault of the STEP.  Mortgage planners and those considering the Smith Manoeuvre should be quite pleased by this new option.

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Yields Way Up

Canada’s 5-year bond closed Wednesday at 2.56%…after its biggest 2-day jump in eight months.

As most know, fixed mortgage rates are linked to bond yields.  Certain non-bank lenders have already reacted by raising rates 0.05% to 0.20%. 

While no big banks have moved yet, they may be getting anxious.  The cost of funds on 5-year money has soared roughly 30% (relatively, not absolutely) in the last month. 

The spread between banks’ advertised 5-year rate (3.95%) and bond yields is now down to 1.39% from about 2.00% a month ago.  When you factor in branch discretion (i.e., the additional discounts offered to some customers), the spread is often even narrower. 

It is difficult to imagine the Big 5 not raising rates if yields move higher.  A lender email from yesterday said: “rates are artificially low. Watch for fixed rate increases.”  Indeed, it seems some lenders are taking extra pains to avoid raising rates and giving up market share.

Front-Loaded Variables With Martin Shao

With the Bank of Canada “promising” a low overnight rate until 2010, many homeowners are considering taking out variable-rate mortgages for a year and then locking in.

We spoke with Martin Shao, President of Valueland Mortgages, about how front-loaded variables fit into this picture.  Our chat follows here…

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CMT:  Martin, Thanks for being with us today. I noticed Valueland now offers a front-loaded variable at prime + 0.10%. Why is a front-loaded variable a good option in this market?

Martin Shao:  According to our central bank’s last monetary policy, Canada's overnight lending rate is expected to remain at a low level until mid next year. As a result, variable rates will remain low for about a year or so.

However, we expect elevated interest rates towards next summer.  People with variable-rate mortgages can then choose to convert into a fixed rate.

Variable-rate discounts after that conversion period do not provide much benefit.

CMT:  Okay, so in other words, a front-loaded variable packs the greatest discount in the first year. Given this, would you recommend that most well-qualified borrowers with sufficient equity choose a front-loaded variable, or a discounted fixed rate?

Martin Shao:  My top recommendation is still for a low discounted fixed-rate mortgage. However, for those who would like to take some risk and save in the first year (when their mortgage amount is the most), front-loaded variables provide more savings up front.

CMT:  What risk is there, over the next year, in choosing a front-loaded variable over a fixed-rate?

Martin Shao:  The risks are associated with the general Canadian economy. If the economy turns unexpectedly better before next summer, variable rate takers would see a negative impact on their mortgage payments.

The second risk is the uncertainty of fixed rates when a variable-rate borrower wants to lock in his or her mortgage rate.

CMT:  Last year, there were several lenders promoting front-loaded variables.  This year there are almost none.  Do you expect lenders will re-launch front-loaded variables anytime soon?

Martin Shao:  With short-term rates stabilizing, lenders may re-launch this type of product in the near future to differentiate themselves. Even without lenders re-launching them, Valueland has started offering front-loaded mortgages in a different form.

CMT:  That’s interesting that you’ve created your own version. Who would you say these products are best suited for?

Martin Shao:  The deep discounted rate for the first year would be best suited for those who are almost 100% sure they will convert their variable rate to a fixed rate mortgage.

CMT:  Excellent. Thanks again for the perspectives Martin.

_______________________________________________________

Martin Shao is founder of Valueland Mortgages. Valueland has a highly successful Internet brokerage model and is based out of Markham, Ontario. Before he became a mortgage broker, Martin had an extensive background in financial services. He holds a B.Sc. and a Master’s degree in financial information management and has been one of ING Direct's and INALCO’s top-performing brokers.

Merix Now At P+0.40% on Variables

Merix Financial has taken the lead in the variable-rate market by offering prime + 0.40% on its Adjustable Rate Mortgage (ARM).

This is the lowest nationally-available variable rate we’ve seen since last fall.  It also significantly undercuts all the big banks.

The news is especially impressive because Merix is a non-bank lender.  It does not have the benefit of deposits, which the big banks are using as a low-cost way to fund their variables.

Merix’s ARM is available through Merix-approved mortgage planners only.  It can be converted at any time to one of Merix’s best discounted fixed-rate mortgages.  It also comes with a 120-day rate hold for purchases and switches, and 60 days for refinances.

Please contact a mortgage planner for complete details.

Regional Mortgage Deals

Credit unions have discovered the power of the Internet. Here are two regional lenders offering selected rates on the net that are well below the market.

In Ontario…

Meridian Credit Union has an ultra-hot, 1-year mortgage promotion going. 

It's offering the “Better Than Market” 1-year mortgage at just 2.25%—about 1/2% below the nearest competitor.

The deal is available only by going direct through Meridian branches.

Meridian calls itself the largest credit union in Ontario, serving more than 214,000 members with total assets under administration of $4.6 billion. Meridian is based in St. Catherines, ON and Toronto.

In Winnipeg…

Cambrian Credit Union is offering a variable-rate mortgage at 2.49% (prime + 0.24%).  That’s 0.36% or more below most other variables.

The deal is available only by going direct through Cambrian branches.

Cambrian Credit Union is Winnipeg’s largest credit union.

The Variable Straitjacket

The Financial Post ran an article last week on a broker who sees “opportunity” in variable-rate mortgages.  It raised a few obvious questions, like:

• Where’s the “opportunity?”
• What are the alternatives?

For new mortgage shoppers, variables are nowhere near as enticing as they were 18 months ago. That’s because variable rates are driven by prime rate and bankers’ acceptance yields. The odds of either of those two things falling much further are minimal. 

This, in turn, means that variable rates probably won’t improve unless lenders cut the premiums they’re charging to prime rate.  Most feel that will happen, but it could take 6-18 months or more.

So, if these probabilities are correct, why would anyone lock into a closed 5-year variable today?  Doing so puts borrowers in a virtual mortgage straitjacket.  It leaves little flexibility and traps homeowners in rate premiums that are well above normal. 

Variable rates have historically been offered at prime rate, or a healthy discount to prime. Today, they’re at or near prime + 0.60%.

Instead of a variable, consider a good one-year convertible mortgage.  For one thing, they’re currently cheaper than most closed variables.  Moreover, the best one-year convertibles let you swap into a discounted fixed- or variable-rate mortgage, at any time, and without any cost. 

You can also hold your one-year convertible for the full 12 months until maturity.  After 12 months, you’ll hopefully be able to secure a variable rate mortgage that is closer to, or less than, prime rate.

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The Mandatory Disclaimer:  This is not a forecast or recommendation.  Rates are virtually unpredictable long-term.   Exceptions to the above do exist.  Although unlikely, it is always possible that the prime – BA spread will shrink in the next 12 months, and actually increase variable-rate surcharges. Market conditions can change at any time. Contact a mortgage planner for recommendations suitable to your particular circumstances.

Variable Rates Fall To Prime + .60%

The typical discounted rate for a 5-year closed variable mortgage now seems to be prime + .60% (2.85% as of today).

Various discount lenders have gravitated to this number in the last week or so. 

Most of the big banks, however, (besides Scotia) are still advertising prime + 0.80%.  A capital markets consultant we spoke with finds that interesting because the big banks generally have the lowest cost of short-term capital right now.

Rate Alert

5-year bond yields have jumped to 2.27%--up 40 basis points in the last 30 days.  As a result, mortgage funding costs are spiking (fixed mortgage rates are generally linked to bond yields). 

A few smaller lenders have already raised, or plan to raise, their 5-year fixed rates.  As reported a few weeks ago, this may be a precursor to further, more wide-scale, rate increases.

If you’re a homeowner considering refinancing into a fixed rate, now may be the time to act.

If you’re a broker floating a fixed rate for a client, you may want to consider locking it in.

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Attribution: Special thanks to the Bank of Canada for the data used in this chart.

The Mandatory Disclaimer:  Accurately and consistently forecasting interest rates long-term is virtually impossible. This is not a prediction or recommendation.  Market conditions can change at any time. Contact a mortgage planner for recommendations suitable to your particular circumstances.

Pre-payments Less Critical Now: Prospera

“The ability to make lump sum [mortgage] payments is much less critical to the consumer – especially in today’s economy.” 

That’s the conclusion of Prospera, a prominent BC credit union.

Prospera commissioned a survey of 603 BC adults in April.  The poll was conducted on Prospera’s behalf by Ipsos Reid. 

Among other things, it found:

• 60% of respondents under 45 years old said they’d be willing to forgo some mortgage payment flexibility in exchange for a lower interest rate.
• 59% were unaware that mortgage rates are typically higher when large lump-sum pre-payment privileges are offered.
• Mortgage payments comprise about 25% of the average Canadian family’s monthly expenses.

These figures seem believable enough.  From the inquiries we get, most borrowers seem less and less concerned about big pre-payment privileges, despite their potential value. 

On the other hand, people do seem to want at least some level of pre-payment ability (5-10% for example).  Very few tell us they don’t care about pre-payments “at all.” 

(Then there are those who absolutely must have a 15-20% lump sum pre-payment option.)

Not coincidentally, in conjunction with releasing these survey results, Prospera launched a brand new no-frills mortgage.  It’s geared to people who “know they will not take advantage of pre-payment privileges and would rather have a lower interest rate.”  Prospera calls it the myStyle Mortgage and it’s currently priced at 3.59% for a 5-year fixed. 

The myStyle Mortgage is just the latest in a series of no-frills launches over the past year.  It’s been said before and we’ll repeat it.  No-frills mortgages are a growing trend and lenders who don’t offer them will give up a lot of revenue over time.

More Challenges Seen For Commercial Financing

Sources quoted by the Globe say Canadian commercial financing has plunged by one third compared to last year.

The Globe’s article had various other noteworthy points:

• A lot of the commercial financing maturing late this year and early next year was supported by mortgage-backed securities. These loans were frequently made at low rates, with little equity, and relatively few conditions.
• This kind of financing is almost non-existent today.
• Last year there was $18 billion of commercial financing available in Canada. This year it’s down to $12-13 billion. The shortage is due to the disappearance of commercial mortgage-backed securities, says Milton Lamb of Colliers International.
• Construction financing has been especially hard-hit.
• Spec builders face huge challenges in getting financed. Pre-sales mean the world, and commercial lenders are now routinely asking for 30-40% equity.
• If you can’t get financed on a commercial project, the article suggests:
• Taking on an equity partner
• Selling other properties to raise cash; or,
• Offering additional properties as collateral.
• Every bit of equity counts. “A 60% mortgage is a lot more attractive to a lender than a 70% one,” says Lamb.

More from the Globe…

Crisis Is Over: CIBC’s Avery Shenfeld

“America’s banking crisis is over,” says CIBC economist, Avery Shenfeld.

He says the market now believes “the fear of failure has been shaken out of the system.”

Avery made the remarks in a research report released Friday.  He expects the US banking crisis will soon “fade out as a concern for anyone other than the affected banks’ shareholders.”

As we reported in Saturday’s TED spread post, some lending indicators do seem to be getting back to “normal,” albeit slowly.  That said, it could be a while before things like variable-rate premiums and lending criteria loosen up to their pre-2008 levels.  Some industry watchers feel the latter (lender guidelines) could remain tighter than normal for a few years or more.

A Nice Little Feature

The Manulife One has a nifty little illustration in its mortgage statements.  It’s a simple graph that shows you how fast you’re paying off your mortgage.

In Manulife’s case, the graph shows both increases and reductions in one’s mortgage balance.  That’s because the Manulife One let’s you re-borrow funds, up to your available credit limit.

This little graph may not be cutting edge but it is nonetheless handy. If you make a pre-payment, for example, you’ll promptly see a reduction in your debt balance. This provides immediate gratification every time you make an extra payment.

A balance graph is something any lender could include on its statements or web portal.  At the very least, it would be nice to see every readvanceable mortgage lender including one.  (Readvanceables allow you to continuously re-borrow, so a focus on paying off the mortgage is especially important.)

TED Spread Nears Normal

“TED spread” became a buzz-phrase last fall when the media quoted it daily as a gauge of the credit crisis.

The TED spread is the difference between what banks and the U.S. Treasury pay to borrow money for three months.  It’s a general measure of fear and liquidity constraints in the North American credit market.

After reaching historic highs in October, the TED spread (see Bloomberg and the chart below) is now almost back to “normal.” In fact, it’s back to where it was before the credit crisis began in August 2007.

(The above chart illustrates data through the end of 2008.)

Three-month Libor-OIS spreads (another interbank lending metric) are also vastly improved.

From a Canadian borrower’s perspective, this is noteworthy. It suggests lenders are paying less of a risk premium to finance certain mortgages.  That, in turn, is slowly reducing pressure on mortgage rates.

This could also foreshadow a positive effect on variable-rate mortgage spreads, which are linked to the short-term money market.  Instead of prime + 0.60% to prime + 0.80% today, lenders may start slowly reducing this premium—assuming there are no more economic disasters. 

If this all plays out, it’s all the more reason not to lock into a rate like prime + 0.75% today.

Mortgage Term Reviews

Picking a mortgage is like buying a diamond. It’s an expensive purchase; you don’t want to screw it up; and getting started can be confusing. The first thing most people choose is their term.  Here’s a Twitter-length review of several terms to get you thinking in the right direction.

Popular Fixed Terms…

• 1-year fixed:  With rates under 3%, they’re a good alternative to 5-year variables—which should hopefully be at prime by the time these puppies mature next May.
• 2-year fixed:  If convertible, then they’re another decent alternative to 5-year variables. You get an extra year of rate security for ~0.20% more than the best one years.
• 3-year fixed:  A nice combination of risk and reward. Versus a 5-year, you’ll save significant interest the first three years. The tradeoff is more risk in years 4 and 5.
• 4-year fixed:  The ugly baby that no one wants. There’s no value here. Go 3 or 5 instead, unless you plan to break in four years and want to avoid a penalty.
• 5-year fixed:  Canadians love their 5-year terms. Now may be the time for the risk averse to grab one, with rates expected to jump later this year or next.

Longer Fixed Terms…

• 7-year fixed:  A rate near 5% isn’t as exciting as 3.79% for a 5-year, so 7-years don’t sell very well. If you’re that concerned about risk, take a 10-year for the same price.
• 10-year fixed:  The decade mortgage is available under 5% for the first time in modern history. Nonetheless, you may pay thousands more in interest versus a 5-year.

Variable Terms…

• 5-year closed variable:  They say prime isn’t going any lower. So why gamble with prime+ variables? Get a convertible 1- or 2-year and wait for prime- to return.
• 5-year capped variable:  You’ll get 3.25% today and never pay over 5.25%. Sounds good, but if you’re that worried, why not pay a little more for a fixed now?
• 5-year open variable:  Closed variables are portable and have just 3-month interest penalties. So, unless you’re going to terminate early, save 0.30% and go closed.

Other Terms and Features…

• 5-year $0 Down:  Despite posted rates falling to 5.25%, the cost of cash-backs is still atrocious. If you can’t put down 5% then renting sounds good in comparison.
• 5-year no-frills:  If there’s any chance you’ll need over 5% pre-payment privileges you’ll be sorry for choosing one. If not, you’ll save some money (0.30% or more).
• Open HELOC: :  The All-in-One is our favourite. It has interest offsetting and automatic everything. We just wish the LOC was at prime again like in December.
• Readvanceables:  Love’em. Gotta have’em. Everyone with 20% equity should own one. They make you liquid, and you can’t put a price on liquidity. More…

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Sidebar:  There are a million and one exceptions to everything above, so call a mortgage planner for a detailed comparison of your options. Qualifying is contingent upon approved credit. These opinions are based on the market and terms available as of today. They will differ over time. This information is not advice and may change without notice!

Cheaper Homeownership Lures First-Timers

It’s sometimes interesting to look back on mortgage markets of yesteryear. In this case we’re going all the way back to September 2008.

In the first week of September, a good discounted 5-year fixed mortgage could be had for around 5.50%.  Today, rates are 3.75% or lower.

That’s a big change in a small amount of time, and it’s coming at a welcome time for the real estate industry.  From a housing demand perspective, any change is welcome right about now. 

The changing cost dynamics are especially good for first-time buyers, which some feel are critical for turning our market around. 

For most new buyers, apart from 1.8% higher unemployment, things are looking better than they did eight months ago.  CREA says “Buyers, especially first-time buyers, are being lured by historically low mortgage rates, greater affordability and increased supply.”

Phil Soper, chief executive of Brookfield Real Estate Services, agrees.  "The uptick in first-time home buyer purchases across the country is quite astonishing," he says.

This trend is being stoked by improvements in affordability. For example, the payment on a $200,000, 35-year amortized mortgage was 20% more in September than it is today. 

To qualify for that mortgage one also needed 20% more income than is necessary today.  For many first-timers, money is tight, so these affordability improvements can mean the difference between renting and buying.

The drop in home prices isn’t hurting new buyers either.  TD estimates the average Canadian home has fallen 13.3% in value from the peak 17 months ago.  That further reduces the cost of carrying a new home—in some markets, significantly.

We haven’t even got into all the tax credits, Home Buyers Plan enhancements and other lures for first-timers. 

Suffice it to say, opportunity is knocking for first-time buyers.  While only time can tell, some feel it’s time to answer.

ResMor 4-Year Variable

For those who haven’t yet heard, ResMor Trust launched a new 4-year variable mortgage on April 22.

It is currently offered at a very competitive rate of prime + 0.60%. That’s about 0.15% to 0.20% below most other lenders.

This new 4-year product is in addition to ResMor’s existing 5-year variable.

Anne Wright, Director of National Sales, says, “Our objective was to offer a unique ARM product at an aggressive rate for clients.”  She says brokers in ResMor’s Elite and Super Elite program can discount the rate even further.

If you’re interested in this mortgage you’ll need to be fairly well qualified (at least a 650 credit score). You’ll also need at least 10% down.

Homeowners can contact any ResMor-approved broker for more information. Brokers should contact their ResMor BDM.

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ResMor Trust Company is a federally regulated trust company providing residential mortgages, mortgage servicing and deposit products through independent brokers. As of April 3, 2009, ResMor had over $5 billion of mortgages under administration representing more than 33,000 homeowners.

Mortgage Job of the Week

This week's featured mortgage career... 

Company: 
    Mortgage Architects — McLister Team
Position: 
    Mortgage Planner
Location: 
    Two positions in West Vancouver, BC; Multiple positions nationwide for agents with existing offices

Click on the position title above for more information. 

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Advertise your mortgage job opening today!  Click here to post. 

Or browse CMT's Mortgage Jobs Database.

Fixed Mortgages: 10 Year vs. 5 Year

After our 10-year mortgage story, one of our readers posed the question of how often 10-year mortgages were a better choice than 5-year mortgages.

We did a study on this a few years ago and decided to update it for this story. 

To see how 10-year terms sized up, we:

• Looked at all available 5-year fixed rate data back to 1967--the earliest 5-year data readily available.*
• Added a 1.25% premium to 5-year fixed rates to arrive at an approximation of 10-year rates.
• Compared the 10-year rate to the average five-year rate a borrower would have received for two consecutive 5-year terms.

The data showed that homeowners would have come out ahead by choosing the 10-year term in only 49 out of 508 months.

While not a strictly scientific result, this statistic (1 out of 10), is similar to findings in the prominent fixed vs. variable studies. In other words, it appears borrowers don't win long-term by paying big rate premiums for "safety."

Some people will nonetheless say it’s different this time, and feel it’s worth paying 1.25% more for five extra years at a pre-determined interest rate. 

There’s no denying that rates are at all-time lows today. Moreover, the odds of rates rising in the short to medium term appear greater than the odds of rates falling. 

Nonetheless, the available data and modern low-inflation monetary policy both support the premise that 10-year mortgages are too expensive.  Therefore, for most, it appears wise to avoid them.

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Sidebar: Special thanks to the Bank of Canada for the data used in this study. * Data Notes: Prior to 1978 the conventional mortgage rate data was a simple average of rates charged by a number of large institutional lenders, including chartered banks for residential mortgage loans as at midmonth. Between 1967 and 1970 the average 5-year rate data also includes rates for 25-year mortgages.