Manitoba credit unions (CUs) have the lowest rates in the country on short-term and floating-rate mortgages. It’s been that way for a while.
Check out these deals, for example:
6-month renewable fixed: 2.14%
Source: Cambrian CU; Crosstown Civic CU
1-year fixed: 2.34%
Source: Cambrian CU; Crosstown Civic CU
Source: Steinbach CU
These kinds of rates are not just one-time promotions. Manitoba CUs consistently lead the country in short-term mortgage pricing. Here’s why…
Cash is King
MB CUs are awash in cash. “Our credit unions are as liquid as they’ve ever been,” Deposit Guarantee Corporation of Manitoba (DGCM) CEO Vernon MacNeill told CMT. He says MB CUs currently have 16 cents of every dollar of assets sitting in cash, which is substantial.
To that, add savings account rates that are among the best in the country (1.75% – 1.80%) and it’s not surprising that MB CUs are racking up those deposits. Much of those funds are even coming from other provinces, thanks to easy online transfer capabilities.
All that cash has to be put to work, and CUs have to match short-term deposits with short-term loans. As such, 6-month and 1-year fixed mortgages are funded primarily by savings deposits, and to some degree chequing deposits, says Peter Enns, CEO of Winnipeg-based Crosstown Civic Credit Union.
The Winnipeg market is “notoriously frugal and price sensitive,” says David Mortimer, SVP Retail Banking at Cambrian Credit Union. That makes it a “hyper competitive” place to do business.
As a matter of fact, next to B.C.’s lower mainland, Manitoba CUs operate in the most competitive credit union marketplace in Canada. 47% of Manitobans are CU members.
“We were pioneers in 2003 when we went to a best pricing model,” says Mortimer. “Before that, one person would get one rate and then the next customer would come in and get a different rate.”
“We felt we could do a whole lot better so we did away with rate specials and negotiations…We [decided on] a value-based pricing model without hassle and negotiation.”
That approach is shared by other Manitoba CUs and it differentiates them from the “discretionary pricing” of the Big 6 banks. In the banking model, a customer’s research and negotiation ability has far more effect on the rate they pay.
Credit unions and banks have largely opposite business models, and it’s why many CUs advertise better mortgage rates.
“A bank’s role…at the end of the day, is to maximize profits for shareholders, whereas a credit union’s purpose for being is to service its members,” says Enns. “It would serve me no purpose to try and maximize profit, because at the end of the day I would turn around and provide that profit to the member (who is the shareholder).”
“We do earn a decent profit but we earn it to maintain our regulated equity level. Anything we earn in excess of that is returned to members.”
“The banks’ objective is to maximize margin. My job is to minimize margin.”
John Hamilton, a spokesman for Credit Union Central of Manitoba, summarizes it like this: “Credit unions have a profit for service model. Banks have a service for profit model.”
Manitoba credit unions fund mortgages mostly from their deposit base. But since they pay so well on deposits, their margins are skimpy. That forces them to keep costs at a minimum.
“The most efficient credit unions in the country are here in Manitoba,” Mortimer says. His company, Cambrian Credit Union, operates at a “sub-55%” efficiency ratio. That means it costs Cambrian less than 55 cents to produce one dollar in revenue. By comparison, the “mid-70s” is a rough average on a national basis, he says.
“Spreads are ultra-thin. That means you better be underwriting [strong] credit. We don’t write off a lot of loans because we are very diligent.” There is no other option.
The river of cash flowing into MB creates a “problem.” CUs have to lend that money out. And lend they do.
Loan growth at MB CUs was 10.3% last year, almost double the national growth rate. “Overall growth was driven by mortgages,” confirmed Hamilton. That was thanks, in part, to uncommonly low rates.
But it’s not just rates and service that people get with credit unions. “Our members also enjoy member equity benefits,” says Enns.
His credit union, for example, rebated 3% of each customer’s interest in 2012. That is $300 for every $10,000 paid in interest or earned on deposits.
Mind you, it can take years to get those rebates fully converted to cash. That’s because credit unions usually allow people to redeem patronage dividends in bits and pieces at a time.
One option is to put your CU dividends in an RRSP account. Various CUs can facilitate that and the member often receives 100% of those dividends in cash at age 65 (or when they die or close their account).
Why Just Manitoba?
So, why can’t CUs in other provinces replicate the mortgage model of their Manitoba cousins?
“I’m not sure that others can’t do it,” says Hamilton. “It’s more a matter of Manitoba credit unions are doing it.”
Enns agrees. When it comes to living off tight spreads and being efficient, “There is nothing in my opinion that would prevent other credit unions from doing [what we do].”
As for MB CUs taking on lenders in other provinces, that’s easier said than done. Apart from capital considerations and other issues, Enns notes, “Provincial legislation prevents us from establishing operations in other provinces.” And to date, we haven’t heard of any MB CU applying for a federal charter.