Numerous lenders trimmed their variable-rate discounts last week, lifting rates anywhere from 5 to 15 basis points.
Higher short-term funding costs are largely to blame. Have a look at this chart of 12-month bankers’ acceptances (BAs), which roughly correlate with lenders’ projected funding costs for variable-rate mortgages.
BA rates usually rise when traders expect Bank of Canada rate hikes. That’s not the case here. Instead, BAs have risen in the face of higher perceived credit risk. Since August 24, when the Chinese stock market crash rattled financial markets worldwide, the 12-month BA rate is up 10 bps.
Even the 1-month BA, a better reflection of current variable-rate funding costs, is up noticeably since the summer.
On top of general credit spreads, two other factors could be at play:
- Some lenders may be rebalancing their portfolios after becoming overweighted in variable-rate loans.
- A few lenders may be suffering from a shortage of short-term deposits (a key mortgage funding source).
Meridian Drops a Rate Bomb
As other lenders were chopping their variable-rate discounts, Ontario’s largest credit union launched a blockbuster VRM sale. Meridian Credit Union, which likes to zig while other lenders zag, is now advertising a spectacular prime — 0.85%. That’s the biggest widely advertised floating-rate discount from any lender in months.
The next best publicly advertised lender-offered rate is 20 bps higher (prime — 0.65%) from Prospera Credit Union, HSBC and Home Trust. Some brokers are discounting even further, with many of them below 2.00% at the moment.
Meridian is selling this 1.85% rate through all of its distribution channels, something brokers will appreciate after being excluded from its epic 1.49% rate sale. But more interesting is the fact that Meridian is securitizing this mortgage, which makes you wonder why other broker channel lenders who securitize are raising their rates.
On the features side, this deal has all the frills:
- A 20% prepayment option
- Portability within Ontario (with a 90-day port gap)
- Ability to lock into a 5-year fixed with no penalty (and Meridian’s conversion rates are actually competitive and transparent, unlike too many other lenders)
- Ability to blend the rate (if you need to add new money)
That last point is key if you ever refinance or move up and need a bigger mortgage. Only a minority of lenders have this feature — i.e., allow you to increase the mortgage while retaining the discount on your existing loan amount.
A few more details:
- Meridian lets you qualify at the contract rate (currently 1.85%) if you’re a safe credit risk and have at least 20% equity. The vast majority of lenders make you prove you can afford payments based on the posted 5-year rate (4.64% currently). Meridian’s policy is a huge benefit if you’re an otherwise qualified borrower who wants a variable, but have temporarily high debt ratios.
- Meridian’s maximum GDS/TDS is 34/44 but Meridian may pull back on the loan-to-value if a client is near the limits of those ratios.
- You must live or work within a reasonable proximity of a Meridian branch.
- Switches are not available (only refinances and purchases).
- Meridian will likely be swamped with applications, so don’t expect rapid turnaround and a quick closing.
The one big string attached to this 1.85% rate is that it’s a fully closed mortgage, meaning you have to ride out the 5-year term unless you sell your home. With Meridian’s port and refinance flexibilities, however, this restriction will not dissuade many borrowers.