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Prime Time at Equitable Bank

It’s been around since 1970, primarily as an alternative and commercial lender. But now, effective Wednesday morning, Equitable Bank becomes Canada’s newest prime mortgage lender.

Equitable is rolling out a slate of mortgage products, both high-ratio and conventional, under the brand name “EQB Evolution Suite.”

The bank’s new offerings include:

  • 3- to 5-year fixed and variable terms (Equitable is adding other terms soon)
  • A rental mortgage
  • A mortgage for newcomers to Canada
  • Financing for vacation/2nd homes
  • Self-employed mortgages with non-traditional income verification (an insurance premium applies)

The mortgages feature:

  • Optional lump-sum prepayments: 15% once per year
  • Optional payment increase: 15% once per year
  • Registration: Standard charges (not collateral charges)
  • Variable-rate terms: compounding monthly with a floating payment
  • Blended rates: Yes (Equitable has same-term blends and increases AND blends and extends without penalty)
  • Portability: Yes (borrowers have an ample 90 days to port)
  • Skip-a-payment: No
  • Online access: No
  • Fixed penalties: Greater of 3-month interest or IRD (based on published discounted rates, not artificially inflated posted rates)
  • Variable penalties: 5-months’ interest in the first year; 4-months’ interest in second year, 3-months’ interest thereafter

In short, Equitable has reasonably favourable mortgage terms, save for the one-time yearly limit on lump-sum prepayments (an annoying restriction, but one that won’t matter to many).

It’s also a bank, which breeds confidence in the minds of many consumers, albeit obviously not to the same degree as a “Big 6” brand.

Other tidbits of note:

  • Equitable is a non-branch bank that distributes mortgages only via brokers
  • Its new EQB Evolution Suite mortgages will launch in the GTA initially, Ontario a few weeks after, out West later this year and Quebec sometime thereafter.
  • The company’s conventional mortgages will be transactionally insured but Equitable will pay the premiums for clients (up to 75% loan-to-value). The benefits are that physical appraisals are not required over 95% of the time, and the mortgages are more easily transferrable at maturity.
  • When asked if prime HELOCs are coming down the road, CEO Andrew Moore says, “for sure.” (Hopefully they’re automatically readvanceable.)
  • One area where Equitable could make a dent is with short-term mortgages. Moore says having a balance sheet makes shorter terms (like one-year mortgages) more appealing to Equitable than certain other lenders, partly due to the liquidity they offer the bank. Given the dearth of competitively priced 1-year terms in the market right now, that’s a positive.
  • Equitable’s non-prime customers can switch into its lower-priced prime mortgages with no legal fees, once they meet prime lending guidelines.
  • Martin Beaudry heads up Equitable’s new prime division. Beaudry had a successful 14-year run with former broker channel lender, ING Direct.

Equitable has made a serious investment in the prime space. Three to five years out, Moore says that its prime volumes could “match the alternative side” of Equitable’s business. That alternative business equates to about $2 billion a year in originations.

Unlike most lenders in the broker channel, Equitable is considering a unique method of funding its prime mortgages: interest-only (I/O) strips. In simple terms, I/O strips are a way for the bank to sell the interest from a mortgage and get that mortgage off its balance sheet. That reduces the lender’s capital requirements and makes those mortgages more economical to fund.

That said, I/O strips are “not very important to us” today, Moore says, because the bank has other ways to fund this business and because the I/O market hasn’t yet matured in Canada. “Our sense is that trades are being done at fairly high discount rates…higher discount rates than the risk on the strips should command. So we’ve been holding our powder dry in terms of selling the strips to get the economics more favourable…But strip sales are happening for sure, and it looks like it will evolve into a more mature market in time.”

With regards to mortgage pricing, Moore says Equitable will be “coming into the market slightly below” general broker rates. “Our view is that we’re going to be very competitively priced…”

Despite being a lender with a balance sheet, Equitable will use its balance sheet only strategically. “Clearly if you’re looking to fund a 5-year fixed conventional mortgage just with GICs, there’s no spread to be had there,” Moore says. “But what we can do is…use our balance sheet to fund the mortgages until they get securitized. We’re not in the business of having warehouses, which you find monolines worrying about trying to get.”

“You’ve seen some of the monolines struggle with funding over the last year,” Moore adds. This is an end that Equitable, as a well-established securitizer and deposit-taking lender, is positioned to avoid.

Rob McLister, CMT