Cheap money fuelled another buoyant year for real estate in 2011.

That helped housing values climb a wall of worry (prices rose another 4.6% Y/Y as of November) despite numerous predictions of a correction. Mortgage balances went along for the ride, growing another 7%.

2011 was a year marked by new mortgage regulations and a rate market that continually surprised most observers. Among all of the various developments, however, there were five mortgage stories that stood above the rest:

1)  New Mortgage Restrictions, Round III

Despite Jim Flaherty’s assertion that “Most Canadians are quite careful and use common sense in their borrowing,” the government tightened mortgage rules for the third time since 2008.

For high-ratio insured mortgages, the Finance Department outlawed both 35-year amortizations and refinances over 85% LTV. That led to:

• An immediate 40% plunge in insured refinances (as per CMHC‘s Q2 stats)
• Greater interest expenses for consumers who could no longer refinance as much high-interest debt
• One less amortization option for well-qualified borrowers who need to maximize cashflow
• A seemingly tacit agreement among the Big 6 banks to reduce their maximum amortizations to 30 years on conventional mortgages (even though this wasn’t officially required by the government)
• Rising popularity of 5% cash-back refinances, which simulate 90% LTV refis but cost more.

The government also made it tougher for non-bank lenders to offer HELOCs when it eliminated government insurance on secured credit lines. That was virtually pointless since the major banks dominate this segment and seldom insured their credit lines anyway. Moreover, HELOCs require strong qualifications and 20% equity and those sorts of individuals rarely default.

2) Freakishly Low Fixed Rates

“Lower for longer.” That was economists’ buzzphrase in 2011 as they were forced to repeatedly push their rate hike forecasts further into 2012-2013.

At the same time, investors spooked by European risk fled to bonds in safe countries like Canada. With our bonds being bought up, bond yields (which lead fixed mortgage rates) dropped like a anvil.

In total, the benchmark 5-year government yield tumbled 115 basis points this year (as of today), hitting several all-time lows along the way.

Lower fixed-rate funding costs led to some spectacular rates this year, like 2.49% for a two-year fixed, 2.89% for a 4-year fixed, 2.99% for a 5-year fixed (for brief stints) and 4.34% for the 10-year.

Despite these bargains, however, rates could have been even lower. Funding costs absolutely permitted it but lenders’ desire for fatter profits kept fixed mortgage pricing higher than normal.

3)  Death of the Variable

Variable-rate mortgages have long been the strategy of choice for savvy homeowners…that is, until August 2011. Variable discounts started shrinking soon after the U.S. debt downgrade. Rates that were once prime – 0.90% ended the year as high as prime + 0.10%.

Lenders made no bones about why they jacked variable rates. Among other factors, banks openly admitted in earnings calls that they wanted wider margins.

With variables becoming so uncompetitive, fixed rates stole the show and the media declared variable-rate mortgages to be “over.”

Fortunately, what dies in the mortgage world can always be resurrected. Expect variable-rate discounts to make a comeback, although it may take a while.

4) Interprovincial Mortgage Brokers

While federal regulation has long allowed bank reps to operate nationwide, provincial regulations have made it onerous for mortgage brokers to do the same. That changed somewhat on July 1, 2011 when the Agreement on Internal Trade dramatically simplified the process for brokers to register in multiple provinces.

Among other things, this change promises to usher in more rate competition and we suspect it’ll be a big net plus for consumers.

5)  FirstLine’s Retreat

CIBC decided this year that improving “customer relationships” trumps deep rate discounts and market share acquisition. In making this strategy shift, CIBC stepped back from the broker channel in a very big way. Its broker division (FirstLine) had some of the worst variable pricing in the channel for much of the year, and generally lacklustre fixed pricing as well.

The results were predictable. In April, FirstLine was the broker channel’s biggest lender. Six months later, its market share had plummeted to fourth place. That left scores of brokers looking for a new #1 lender.

Lenders on the Move: In addition to the big news of 2011, there were notable lender movements.

We saw lenders come…

• MonCana Bank (a new broker-only lender)
• Equity Financial Trust (a new non-prime broker-only lender)
• Radius Financial (formerly MyNext Mortgage, it opened its doors to all approved brokers)
• Xceed Mortgage (which re-entered the broker channel in October)

…and we saw lenders go:

• Desjardins (merged into Meridian)
• Macquarie Financial (left the broker channel)
• Concentra Financial (left the broker channel)
• Xceed Mortgage (left the broker channel in January 2011 before returning per above)

2012 promises to be as competitive as ever. Hopefully we see more incoming lenders than outgoing ones.

Rob McLister, CMT

Last modified: April 29, 2014