More Canadian Mortgage Fallout

rates2 The subprime mess and credit crunch are now affecting variable rate mortgages.

In many cases, investors can’t (or aren’t) differentiating between U.S. and Canadian mortgage-related investments.  Even though our real estate market is far stronger than the American market, these investors are demanding higher risk premiums all around.  That’s pushing up Canadian variable rates–even for people with good credit.

Variable rates are typically priced at prime rate less a discount.  That discount has been as much as 1.01% below prime in recent months.  Now we’re seeing some big lenders cut their discounts, to prime – 0.50%

If you need a variable rate mortgage in the next four months, we urge you to lock in your rate now!

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In a related story, many Canadian banks, non-bank lenders and mortgage brokers have been slashing staff lately.  A lot of good mortgage professionals are losing their jobs.  It’s a growing concern for us in the industry because not only are choices dwindling for borrowers, but the job cuts mean that mortgage service is deteriorating as well.

  1. “Now we’re seeing some big lenders cut their discounts, to prime – 0.20%”
    In a variable rate scenario, will this effect an existing mortgage or only ones that are started from this point forward?
    For instance, can your lender change your ‘variable rate’ from Prime – 0.75% to Prime – 0.20% when they want, much like a credit card?

  2. Melanie,
    Thanks for the update. However,
    it doesn’t seem that the big-6 have changed their discounts on variable rate mortgages. Can you confirm otherwise? PC financial has gone from 80 bps to 45 bps.
    Invis can still do 102 bps off prime (3 mo BA + 85 bps).

  3. Looks like Invis needs to update their website because the 30-day (sorry not 3 month) BA is now much higher than they indicate (4.87 vs. 4.38).
    So that puts their variable offer (based on the 30-day BA) at 5.72%, or only 53 not 102 bps off prime. Not bad not great.
    ING is at 5.35% and Dundee Bank is at 5.30%. These are the best I can see.
    Jim

  4. Hi Jim!
    Thanks for the posts. The confusion was our fault.
    The decline in bankers acceptance spreads is affecting all lenders. However, the “big lenders” we referred to are all non-bank lenders.
    Mind you, almost all banks will probably raise their variable rates soon as well–if they haven’t already. Otherwise their profitability will suffer significantly.
    On a related note, the story quoted prime – 0.20% when it should have quoted prime – 0.50%. The 0.20% noted in the original article was a revised post-teaser rate by a major lender–not a general 5-year variable rate. A correction was issued in today’s post.
    Last but not least, we’ve received a bunch of questions about what’s been driving variable rates these past few days. We’ll do a story on it shortly.
    THANKS as always for the valuable feedback Jim.
    Have a great night!
    Melanie

  5. Hi Traciatim,
    Great question! The answer is no. Lenders won’t change the rate discount after your mortgage has closed.
    This change will only affect unfunded variable rate mortgage commitments issued after the lender’s cutoff date.
    Melanie

  6. Melanie,
    I find this statement you made significant.
    “Mind you, almost all banks will probably raise their variable rates soon as well–if they haven’t already. Otherwise their profitability will suffer significantly.”
    By raising their variable rates, I assume you mean cut their discount.
    To actually raise their rates would require that banks increase their prime rate. The big 6 banks have not changed
    their prime lending rate out of step with the Bank of Canada’s overnight target rate since September 1997. The spread between the major banks’ prime rate and the BoC’s overnight target rate has been consistently 175 bps for a decade! If the major banks increase prime from 6.25% to 6.50%, without a BoC move,then the spread would widen to 200 bps. That would be a significant event.
    Jim

  7. Hi Jim,
    Thanks for the interesting post. For the sake of readers who might not know how variable rates work, I’ll reiterate it briefly below.
    As you noted, variable mortgage rates can rise in two ways:
    A) Lenders can raise their prime rate; and/or,
    B) Lenders can reduce their discount to prime rate.
    The latter is what is happening now thanks to tightening spreads in the bankers acceptance market.
    It’s very rare, as you point out, that banks raise their prime rate without a Bank of Canada move first.
    Take care,
    Robert, Co-Ed., CMT

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