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D+H report cover

D+H released some useful new mortgage consumer data last month, and it yielded some surprises. I covered a few of the key findings in this Globe story over the weekend, but below are the stats in more detail. (Our comments in italics.)

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The study segmented consumers into two types:

  • ‘New’ borrowers, or those originating a new mortgage on a new property
    • Two-thirds of these folks are first-time buyers
    • They tend to be younger, more likely to use a broker, more likely to buy additional products (e.g., Mortgage Insurance, Line of Credit) and more nervous at the beginning of the mortgage process
  • ‘Re/Re’ borrowers, or those renewing or refinancing an existing mortgage
    • These folks tend to be older, more confident and much more likely to use a bank or credit union/CU

Transaction Types:

D+H says mortgage transactions can be broken down as follows:

  • 47%: Renewals of existing mortgages
  • 18%: Refinancing of existing mortgages
  • 24%: New mortgages – First-time buyers
  • 12%: New mortgages – Prior mortgage experience

Where people got their mortgage:

  • 62%: Obtained their mortgage through a bank
  • 29%: Obtained their mortgage through a broker
  • 8%: Obtained their mortgage through a credit union

How applications are taken:

  • 62%: Completed their application at a broker’s office or a lender’s branch
    • For the majority, personal one-on-one service still wins out
  • 11%: Were taken by phone
  • 10%: Used an online form
  • 7%: Had an adviser come to their home
  • 7%: Met an adviser at a local coffee shop or restaurant
  • 36%: Completed a paper application

Approval times:

  • 1 day: The median time for approval
  • 15%: Received approval in a week or longer
    • It boggles the mind how some “A” lenders think an approval in 5+ days is reasonable

Cross-selling:

  • 72%: Obtained one or more additional products with their mortgage
    • 36%: Mortgage Life Insurance
    • 30%: Line of Credit
    • 24%: Appraisal (We wouldn’t have included appraisals as a “product” for these purposes, but anyway…)

Individuals vs. Institutions:

  • 63%: Said they value the individual over the institution
    • Individuals matter more, but the reputation of the financial institution becomes increasingly more important to the older age groups

Information Sources:

  • 72%: Sought information on rates from their own financial institution (FI)
  • 54%: Sought information from other FIs
  • 31%: Sought information from brokers

Self-sufficiency:

  • 48%: Of previous applicants feel they could do everything themselves online for their next mortgage
    • The exact question D+H asked respondents was: “Having gone through the mortgage process, do you feel confident that should you need to obtain another mortgage in the future, you could do everything yourself online?” 
    • Near half is almost unbelievable. Does this reflect some overconfidence, or a consumer that is coming of age given today’s breadth of online mortgage tools?
  • For those that did not think they could do it alone, the biggest barriers were needing help/advice (32%), not knowing enough (22%) and not being confident enough (17%)

Survey

Knowledge of Mortgage Terms

Borrowers had a good working knowledge of some terms, and others, not so much:

  • 86%: were aware of the term “pre-approval”
  • 84%: were aware of the term “closed term mortgage”
  • 81%: were aware of the term “amortization”
  • 55%: were aware of the term “rate hold”
  • 49%: were aware of the term “high ratio”
  • 43%: were aware of the term “portable”

Research Habits – Segment Difference

  • 58%: Of new mortgage applicants are likely to search for how much mortgage they could qualify for
    • Vs. 25% for “Re/Re” applicants
  • 58%: Of new mortgage applicants are more likely to search for who could provide their mortgage
    • Vs. 24% of “Re/Re” applicants
  • 41%: Of new applicants are likely to search for what documentation is needed
    • Vs. 26% of “Re/Re” applicants
  • 30%: Of new applicants are likely to search for what steps are involved in the mortgage process
    • Vs. 13% of “Re/Re” applicants

Decision Drivers (All shares sum to 100%)

Of all the factors impacting where to get their mortgage:

  • 17%: said the “mortgage rate” had the highest importance
  • 12%: said “no unexpected charges”
  • 12%: said “special mortgage features”
  • 33%: Of applicants said the ability to only get a mortgage online was a barrier to selecting that provider

Best and Worst:

In rating the mortgage process:

  • Highest grades (A/A+) were from applicants who had time to read the documents before signing, who were dealing with an originator they knew, and who completed the application verbally
  • The worst grades (C) were from applicants who felt pressured to sign documents without the time to read them, who were also under time pressure to close, and who had completed a pre-approval

Location of Application Completion

  • Those who complete the application at home were more positive about the application process overall
  • Those who complete the application in an office or branch give higher grades than do those who completed the application on a website
    • This and the stat above it support the concepts of mobile mortgage specialists and brokers who make house calls
  • The entire process was deemed slightly less positive if paper forms were used

Sore Points in the Process

What caused the most pain during the mortgage process:

  • 30%: said it was the “amount of paperwork” involved in the application process and fulfilling conditions
  • 27%: said it was the fact of being “unsure if I got the best rates”
  • 20%: said it was finding time to meet with the broker/bank rep/credit union rep

Information sought before start of the transaction

  • 72%: searched for the rates being offered at their financial institution
  • 54%: searched for the rates being offered at other financial institutions (banks/credit unions)
  • 31%: searched for the rates being offered by mortgage brokers

Consumer survey 2

Best Sources of Information

Here is what people called the best sources of mortgage information:

  • 35%: said a bank branch/credit union
  • 21%: said a mortgage broker
  • 17%: said online through a bank/credit union website
  • 7%: said online information (in general, e.g., through Google search, etc.)
  • 7%: said online through a mortgage website(s)

Top Reasons for Not Using the Same Mortgage Originator Again

  • 56%: because they had a bad experience or dispute with them in the past
  • 51%: because they did not provide the best rates
  • 40%: because they “made me feel pressured”

 


Survey Details:  D+H conducted this survey online in September 2015 and used a sample size of 400 consumers who had completed a mortgage transaction in the past 18 months. The study included borrowers from both the retail and broker channels. Here’s the full report.

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RateHub report coverLender and broker executives are keenly interested in how today’s mortgage consumers are engaging with technology, so they’ll likely be pouring through RateHub.ca’s new Digital Money Trends Report.

Based on RateHub user data and opinion surveys, this new report yields fresh data on mortgage search habits. Among other things, it finds that:

  • Canadians use mortgage-related keywords in search engines more than 700,000 times per month
    • 142,600 of these are rate-related, which shows there’s more on people’s minds than just the lowest rate
  • 28,600 searches are related to mortgage brokers
  • “RBC” is the most popular bank-related mortgage search topic with 72,000 hits a month
  • “Dominion Lending Centres” is the most popular brokerage-related search at 6,600 searches
  • Two-thirds of rate-site users are male and between 26 and 45 years old

Product Preferences

The report profiles what kind of mortgages people are hunting for online. Not surprisingly, 5-year fixed rates continue to be the most researched product; 42% of all RateHub.ca searches were for 5-year fixed mortgages.

Notably, variable rate searches reached a four-year high last year. 42% of all RateHub.ca user requests in 2015 were for variable rates, up from 15% in 2012.

RateHub says this implies that Canadians expect interest rates to remain low over the medium term, and that they are looking to take advantage of the lowest rates in the market to combat rising housing prices.

In this author’s experience, it’s also reflective of the type of mortgage holders who visit rate sites—typically a greater mix of well-qualified and well-educated borrowers who can better handle rate risk. It also speaks to today’s broader awareness of the historical out-performance of short-term and variable-rate mortgages.

Source: RateHub.ca

 

  • Only 1 in 5 of its users’ searches were for non-5-year terms
  • Less than 1% of requests in 2015 were for 10-year fixed terms, down dramatically from 13% in 2012. It would help if lenders priced more aggressively on 10-year terms, but 10-years are disproportionately expensive to fund/securitize and manage (since borrowers can escape after five years with just a 3-month interest penalty).

Source: RateHub.ca

 

“The majority of our customers are a younger demographic, they are skeptical about the products offered by their primary financial institution, and they are accustomed to comparison shopping online like they do with travel, through sites like Kayak or Expedia online,” said Alyssa Furtado, Founder and CEO of RateHub.ca. Being rate-driven, tools like RateHub.ca have worried some in our business. They believe that rate sites will de-emphasize personalized advice and drive down commissions. That has indeed happened, but not to a great degree (so far). Mind you, rate sites are still early in the adoption curve.

 

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MPC Mortgage reportMortgage Professionals Canada (previously CAAMP) released its marquis fall mortgage research report this month. We’ve extracted all of the trends that seem new or notable.

You’ll see the most relevant findings below. (Data points of special interest appear in blue.)

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The Market Overall

  • 9.74 million: Number of homeowner households in Canada (up from 9.62 million in 2014)
  • 5.71 million: The number of households who have mortgages and may also have a Home Equity Line of Credit (HELOC)
  • 520,000: The number of households who have no mortgage but do have a HELOC
  • 2.15 million: The number of Canadian households who have HELOCs
  • 3.51 million: Number of households who are mortgage-free (down from 3.98 million in 2014)
  • $3 trillion: The total amount of home equity wealth in Canada
    • By comparison, Canada’s annual GDP is about $1.8 trillion. Imagine knocking 20% off home prices, and the wealth devastation that would have—particularly for people who rely on their home equity for retirement.

 

Housing and Mortgaging Activity During 2015

  • 5%: Percentage of Canadian households that buy a home in any given year
  • 89%: Percentage of homes purchased in 2015 that have mortgages or a HELOC
  • 76%: Percentage of 2015 homebuyers choosing fixed rates
  • 20%: Percentage of 2015 homebuyers choosing variable/adjustable rates
  • 4%: Percentage of 2015 homebuyers choosing combination mortgages
    • Hybrids continue to be the most undermarketed and underrated mortgage type available, especially with so much rate uncertainty (and not just rate hike uncertainty, but rate cut uncertainty)
  • 660,000: Number of homes purchased in 2015 (existing and resale combined)
  • 590,000: Number of households who bought a home and financed it (mortgage and/or HELOC) in 2015
    • 15% chose both a mortgage and a HELOC (typically a “readvanceable mortgage”)
  • 1 million: Number of homeowners who renewed or refinanced their mortgages during 2015
    • And convenience continued to trump absolute savings as the large majority renewed with their existing lender

 

Mortgage Types and Amortization Periods

  • 24%: Percentage of mortgages on homes purchased during 2014 or 2015 that have extended amortization periods
  • 23%: Percentage of mortgages with amortizations of 26-30 years
  • 1%: Percentage with amortizations over 30 years
    • Thank you to the lenders who continue to offer 35-year amortizations (RMG, B2B Bank, Alterna, Vancity, Coast Capital and so on). You do a tremendous service to well-qualified borrowers who prefer payment flexibility

 

Actions that Accelerate Repayment

  • 950,000: Number of mortgage holders who voluntarily increased their regular payments in 2015
  • 1 million: Number of mortgage holders who made a lump-sum payment in the past year
    • That’s about 17.5% of mortgagors
  • $15,300: The average lump-sum payment amount

 

Renting Secondary Suites

  • 14%: Percentage of mortgage holders who rent or plan to rent out part of their home
    • For many of these folks, it’s now easier to qualify for a mortgage, courtesy of insurers’ more generous add-back rules
  • 21%: Percentage of those who rent out (or plan to rent out) a portion of their home, who indicated: “I need to rent a room/unit in my home to afford my mortgage”
    • Given that secondary suites have been an important income source for homeowners, Dunning says it would be useful to clarify and simplify the processes for complying with municipal standards. We second that idea as most new landlords don’t know all the requirements to have a legal suite

 

Recent Homebuyer Mortgage Choices

  • 45%: Percentage of mortgages that were obtained from a Canadian bank
  • 42%: Percentage of mortgages that were obtained from a mortgage broker
  • 13%: Percentage of mortgages that were obtained elsewhere

 

Interest Rates

  • 3.07%: The average mortgage interest rate in Canada
    • Compare that to 3.50%, the average interest rate in the 2013 fall survey
    • Average actual rate for 5-year fixed-rate mortgages (2.81%) has been 1.87 percentage points lower than typical “posted” rates
  • 2.80%: The average interest rate for mortgages on homes purchased during 2015
  • 2.67%: The average rate for mortgages renewed in 2015
  • +/- 1/2%: Estimated change in annual credit growth for every one point change in mortgage interest rates

 

Home Equity

  • 49%: The average percentage of home equity for homeowners who have a mortgage but no HELOC
  • 75%: Percentage of the 5.71 million homeowners with mortgages (but not HELOCs) who have an equity ratio of 25% or more
  • >300,000 (3%): Number of homeowners who have less than 10% equity
  • $136,000: The average approved HELOC value
  • 10%: Percentage of homeowners who have fully utilized their available HELOC

 

Equity Take-Out

  • 9% (850,000): Percentage of homeowners who took equity out of their home in the past year
  • $70,000: The average amount of equity taken out

 

Sources of Down Payments by First-time Homebuyers

  • 21%: The average down payment made by first-time buyers, as a percentage of home price
    • Dunning notes that this percentage has remained stable over time, at 20% of the purchase price
    • The report notes that, “the rapid rise in house prices means that required down payments have increased relative to incomes”
    • “Given the increasing burden of down payments relative to incomes, that stability is surprising,” Dunning said
  • 19%: Percentage of down payments by first-time buyers that came from family or friends (in the form of loans or gifts)
    • The long-term average is 15%
  • 26%: Percentage of down payment funds for first-time buyers that is loaned from financial institutions
  • 8%: Percentage of down payment funds that come from RRSP withdrawals
  • 93 weeks: The amount of working time at the average wage needed to amass a 20% down payment on an average-priced home
    • This is up from 53 weeks two decades ago

 

Homeownership as “Forced Saving”

  • 50%: Approximate percentage of the first mortgage payment that goes towards principal repayment (based on current rates)
    • This ratio rises incrementally with every mortgage payment a borrower makes
    • Mortgage payments now include a higher amount of principal repayment, “in both absolute dollar terms and as a percentage of the monthly payment.” This suggests that homebuyers are “now entering into very aggressive forced saving programs,” says Dunning
    • By contrast the first payment principal ratio was 31% a decade ago when rates were at around 4.7%, and 13% two decades ago when rates were at around 8.2%

 

Mortgage Payments as a Percentage of Monthly Wages

  • 39.5%: Mortgage payments in 2015 as a percentage of monthly wages
    • 38.6% is the long-term average

 

On The Recent Minimum Down Payment Change

  • 155,000: The number of home sales each year (out of 620,000) valued at $500,000 or more
    • 120,000-125,000: Number of these that have mortgages
  • 10,000 (2%): Percentage of annual homebuyers that would see increases to their required down payments as a result of Ottawa’s new rule
    • This is obviously peanuts. It’s almost like the Department of Finance created a rule for rule’s sake, not that this author is complaining
    • More on the new down payment rules

 


Sidebar:  This year’s report was based on responses from 2,001 Canadians.

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CD Howe surveyThe “sustained low interest-rate environment” has caused a “significant minority” of Canadians to take on more mortgage debt than they can comfortably manage. That was the conclusion from a recent study by C.D. Howe.

Out of all the study’s findings, the one garnering the most headlines was the percentage of homeowners with a mortgage debt-to-disposable income ratio in excess of 500%. That number has rocketed from 3% in 1999 to 11% in 2012 (the latest data available). That’s upwards of half a million households.

That led the study authors, Craig Alexander and Paul Jacobson, to suggest that the federal government “may want to consider further policy actions to lean against the shift towards significantly higher mortgage burdens.” This is despite their conclusion that “the majority of Canadians have been responsible in their borrowing.”

Coincidentally, this study came out right before the Finance Department raised minimum down payments. That measure addressed some of Alexander and Jacobson’s concerns, but not all. They note that highly mortgage-indebted households are more likely to be

  • in the lower-income quintiles
    • i.e., not buying the $500,000+ homes targeted by the new down payment rules
  • younger Canadians who have recently entered the housing market
    • the average first-time buyer’s purchase price is $293,000, says the DoF, again, less than $500,000
  • from provinces with the biggest housing booms.

Also concerning is the fact that roughly 1 in 5 mortgage-indebted households have less than $5,000 in financial assets to draw upon if they lose their job or face surging interest rates. Worse yet, 1 in 10 have less than $1,500 in financial assets and are considered “extremely vulnerable to a negative economic or financial shock.”

“This represents an inadequate financial buffer,”  say the study’s authors, “as the Statistics Canada Survey of Household Spending indicates that average mortgage payments are more than $1,000 a month, before taxes and operating costs.”

All of this speaks to two risks. The first is obviously the financial risk to the borrowers themselves. Even if arrears rates stay contained as expected, no one wants families backed into a debt corner, doing things like racking up unsecured debt to finance secured debt.

The second risk is systemic (i.e., what happens to our financial system if default rates are higher than anticipated?). Default insurers claim they can withstand a U.S.-style housing sell-off without dipping into taxpayer pockets. (By the way, we are assuming/hoping that insurer’s stress tests rest on adequate assumptions.) But the mortgage market would nonetheless endure painful market volatility, huge risk premiums and illiquidity. These effects would be (will be) exacerbated if debt ratios continue moving in the wrong direction.

Hence, if home prices in T.V. (Toronto/Vancouver) continue climbing in 2016, the DoF may not be finished it’s policy tightening. Lowering maximum debt ratio guidelines and increasing minimum credit scores (especially for borrowers making small down payments) could get more attention in Ottawa.

But Alexander and Jacobson wisely recommend that any new mortgage rules be targeted. The last thing anyone wants are weak markets getting weaker with a national policy intended to rein in T.V. lending.

Moreover, given enough time, natural economic forces would address some of the imbalances we’re seeing, specifically

  • higher prices would curtail demand
  • higher rates would crimp affordability, and hence prices (best not hold your breath on this one)
  • higher incomes would improve affordability and debt ratios (for many)
  • housing supply would catch up with demand (maybe not in the major single-family urban markets, but definitely with multi-family units and suburban housing)

But policy-makers are likely not content to let the “invisible hand” correct household debt risks on its own. So keep an eye on this chart through the first half of 2016. It may have magically predictive properties for new mortgage rules.

National Average Home Price


Other notable findings from the survey:

  • B.C. has gone from a primary mortgage-to-disposable income ratio of 250% in 1999 to 375% in 2012 (Remember that’s an average, so many are above this ratio)
  • Ontario’s average mortgage-to-disposable income ratio rose from nearly 200% to around 350%
  • The share of young households (age 25 to 34) with ratios above 300% has increased by almost 27 percentage points
  • 14% of those aged 25 to 44 have ratios above 500%, along with 16% of those 65 to 75 years old vs. just 5% of those aged 45 to 54

Ultimately, debt service ratios (a.k.a., affordability ratios) are far more predictive of losses than debt-to-income ratios, and Canada’s average debt service ratio isn’t far from its long-run average. But we may never realize how close some people are to the edge until interest rates or unemployment spike.

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2015 CMHC First-Time Homebuyers SurveyMore first-time buyers use brokers than any other mortgage channel, 55% of them to be exact.

It’s hard to overstate the importance of that. It makes brokers extremely important conduits for lenders who want clients that represent long-term revenue—and what lender doesn’t?

That fact was established once again with the release of CMHC’s 2015 First-Time Homebuyers Survey. Here are five other stats brokers need to know from that report:

  1. 73% who went online did so to compare other mortgage products.
    • As a broker or lender, do you have ways to help consumers compare your offerings to others?
  2. 30% of first-time buyers found their lender or broker site through online ads.
    • Mortgage providers seem to be increasingly utilizing banner ads, especially retargeting banners, which have up to 70% higher conversion rates. Overall, less than 1 in 1,000 consumers click banner ads. But posting targeted attention-grabbing ads, “above the fold,” and in relevant media can boost click-through to 1 in 100 or better.
  3. 98% of first-time buyers (FTBs) who received a recommendation to use a specific lender ended up using the lender channel.
    • These recommendations are most likely to come from real estate agents. It’s no surprise then that banks pay real estate brokerages up to 50 bps or more for referrals.
  4. 43% of FTBs arranging their mortgage directly with a lender dealt with someone who exclusively specialized in mortgages.
    • It’s your biggest financial obligation, folks, and good advice can pay for itself 10-fold. Choose a mortgage expert, not a jack-of-all trades. If you want investing or insurance advice, get a separate referral.
  5. Providing advice on long-term mortgage strategies can increase a first-time buyer’s satisfaction with their mortgage professional by up to 85%.
    • This is something very few online mortgage discounters focus on. Providing thoughtful, customized mortgage amortization plans is a differentiator for any originator.

Here are a few more stats of interest from CMHC’s report…

Use of Online Resources

  • 83% of FTBs went online to gather information about mortgage options and features (roughly the same as last year, and likely under-reported).
  • Of first-time mortgage shoppers who went online:
    • 53% visited lender sites, while almost one-third (31%) went to broker sites.
    • 70% used an Internet search engine such as Google when looking for lender or broker sites.
    • 84% used an online mortgage calculator.
    • 37% used different social media platforms to research mortgage information (vs.19% for other mortgage consumers).
  • 26% used a mobile device to find mortgage-related information.
    • In about one-in-five cases, mobile users accessed a mortgage-related app.

Interaction with Mortgage Professionals

  • 42% of repeat buyers reported arranging their mortgage through a mortgage broker.
  • 57% of broker users and 54% of lender customers said the desire to get the best rate or deal had a “great deal” of influence on where they got their mortgage.
  • 79% of those receiving a recommendation to use a specific broker ended up using a broker.
  • 72% of first-time buyers who switched financial institutions arranged their mortgage through a broker.

Buyer Satisfaction

  • Half of first-time buyers who received advice from their mortgage professional reported the advice to be “very useful.”
    • There’s clearly a huge opportunity to better educate new homeowners.
  • 34% of first-time buyers “totally agreed” that they got the best mortgage deal for their needs (vs.47% for repeat buyers).

 


Survey note: CMHC’s survey interviewed 788 first-time homebuyers from across Canada. Individuals polled had all undertaken a mortgage transaction in the past 12 months and all were one of the prime decision-makers within their household for matters relating to housing finance and mortgages.


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As the largest mortgage broker firm in Canada, Dominion Lending Centres (DLC) collects loads of valuable statistics. So when we asked for data on how mortgage rate buydowns are affecting brokers, we were very happy it obliged.

Here is some of the information the company provided to CMT. Note: These figures do not include Mortgage Centre Canada, which is owned by DLC:

DLC-Stats

 

The above numbers highlight some notable trends:

  • There’s been only a slight downtrend in broker compensation per deal, suggesting pressure on brokers to buy down mortgage rates has been less than first thought. Since the bulk of successful brokers are older and more experienced at selling value (not just rate), and since online rate comparison is still not mainstream (at least according to Maritz data), it could potentially take 2-5 more years before we see widespread material drops in average basis points per deal. That reflects this author’s best guess only.
  • DLC and Mortgage Centre set volume records this summer, as did multiple other industry firms. That’s likely due to internal growth initiatives to some extent, but we can’t ignore that the mortgage market is exceeding expectations yet again. BMO Capital Markets says mortgage growth is almost back to 6% year-over-year. That’s the highest in two years and 100-200 bps above most analysts’ expectations at the start of the year. This rising tide is lifting more boats throughout the mortgage industry, thanks to astoundingly low rates and non-stop house appreciation in the major metros.
  • DLC’s average volume per agent is up 77% in five years to $7.86 million. That compares with anecdotal industry estimates that range from $4.5 to $5.5 million. DLC has clearly brought on more productive brokers in recent years, and worked hard to train existing brokers how to be more productive. Quality training is not only in the agent’s best interests, it’s vital to a company that relies on a 5% royalty from every commission.

We stress that these numbers should not be extrapolated to the industry as a whole, but they’re thought-provoking nonetheless. Brokers just getting into the business, for example, might find them helpful for benchmarking purposes, as might competitors looking to improve their own production.

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Three out of four Canadian bank customers say their primary bank fails to meet their expectations. That’s according to a recent survey by FIS, whose findings identify key areas where banks must improve.

Banks get high marks for things like in-person service, convenience and online connectivity, but fall short in terms of fairness of fees, following through on promises, rewarding loyalty and transparency of pricing. These shortcomings are something to heed for all bank challengers, including mortgage brokers and credit unions.

Bank-Satisfaction

As a whole, Canadian banks got a 76 out of 100 satisfaction rating (with 100 being the goal). Credit unions fared notably better, scoring 88 out of 100.

Those most happy with banks tend to be older (45-64 years old), while less satisfied consumers tend to be younger (35-44). That younger demographic does 30% more transactions at alternative financial service providers.

Based on FIS findings, banks have three key opportunities to build consumer trust. These are all areas where they underperform:

  • Providing easy-to-understand pricing and terms
  • Following through on promises (although FIS’s report was a bit vague on this point)
  • Being fully transparent on fees and charges

Many brokers and credit unions (but far from all), already do a banner job in these three areas by:

  • Not posting unrealistically high mortgage rates
    • Leading the pack are competitive mortgage brokers and forward-thinking lenders like Meridian Credit Union, all of whom openly advertise better-than-average pricing on their websites
    • By contrast, banks typically advertise above-market posted or special-offer rates, forcing customers to negotiate to obtain competitive discounts. As a case in point, only one of the Big 6 Banks (BMO) is advertising a reasonable 5-year fixed rate (2.59%) at the time of this story, and that’s for a restricted mortgage.
  • Offering products with fair prepayment charges
    • Versus painful bank penalties based on “discounts” from artificially high posted rates
    • Note: Some brokers sell deeply discounted rates with penalties that are just as bad as the banks, if not worse, but any broker worth his/her salt unambiguously explains the tradeoff of those products, while simultaneously offering less restrictive alternatives.

As is visible in the chart above, reliability and security are also crucial to bank customers. Virtually all serious bank challengers also build those elements into their marketing playbooks.

Side Note: FIS’s survey included 1,000 financial decision-makers in Canada, aged 18-75, who have a chequing account, or equivalent, with a financial institution.

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Manulife released new data this week on homeowners’ tendency to prepay their mortgages, as well as their ability to withstand interest rate hikes. Here’s what those numbers revealed.

Prepayment Trends

Mortgages with big prepayment allowances save a small fraction of the population a lot of interest. There’s no disputing that. But for most, they are one of the more over-rated mortgage features. Manulife’s Homeowner Debt Survey supports that assertion.

The report found that while 40% of mortgage holders paid extra on their mortgage last year, those payments totalled only 3.3% of the average Canadian’s mortgage balance (which is $190,000). Moreover:

  • Fewer than 1 in 15 mortgagors pre-paid more than $10,000.
  • Only 1 in 50 prepaid more than $25,000 (i.e., more than 13% of the average Canadian mortgage balance).

This chart from Manulife helps explain why 6 in 10 mortgagors are passing up prepayments.

 

Extra payments

Borrower Stability

It’s encouraging that 56% of homeowners said they reduced their debt in the past year. That’s up from 51% a year ago.

Clearly, the majority of borrowers have household debt under control. But Manulife’s survey revealed some sobering statistics on the minority, like the fact that 40% of homeowners claim they’d struggle to make their mortgage payments within three months of being out of work.

In the event that the primary income-earner lost his/her job:

  • One in six homeowners said they’d struggle to make their regular mortgage payment within just one month.
  • Over a quarter (27%) would struggle to do so after three months.

And then there are interest rate hikes to consider:

  • More than a third of homeowners surveyed would encounter “financial difficulty” if their mortgage payment increased by just 10%.
  • 15% of mortgagors said they could not absorb any increase in their payment.

Now, mind you, surveys have a funny way of drawing out biased responses. And this may be one of those cases.

CAAMP economist Will Dunning told Amanda Lang his research suggests that many people have paid more than they’re paying now. Yet those same people say they can’t afford higher payments.

“Probably, they’re not telling us what they can afford,” he said. “They just don’t want to see their payment rise…”

Whatever the case may be, it appears there is still ample room for financial improvement before a sizable minority of homeowners achieve a good night’s sleep.


The Survey: The Manulife Bank of Canada poll surveyed 2,372 Canadian homeowners between ages 20 to 59 with household income of $50,000 or more. The survey was conducted online by Research House between February 10 and 27, 2015. National results were weighted by province, income and age.

 

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CAAMP’s semi-annual mortgage surveys have gobs of data that gauge the pulse of the market. But the best parts of these reports are the new data points that shed light on previously unexplored topics. This year’s Spring Survey didn’t disappoint in that sense.

It reveals brand-new numbers on topics ranging from the risks of increasing the minimum down payment to pre-approval utilization to mortgage rate shopping habits.

Without further ado, below are the key numbers with selected key stats in red. Our comments in italics.

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CAAMP Spring report 2015

Who’s buying homes today?

  • 620,000 households move into dwellings they have purchased each year.
  • 45% (280,000) are first-time buyers.
    • Most of these are between the ages of 25 and 34.
  • Just over 20% (130,000 per year) are making their second purchase.
  • One-third (210,000 per year) are making their third or subsequent purchase.

 

What are they buying?

  • 57% (360,000 people) bought single-detached homes.
  • 10% (60,000 people) bought semi-detached homes and row homes.
  • 19% (120,000 people) bought condominium apartments.
  • Of the above housing types, the percentage of units that sold for more than $1 million was: slightly above 1%.
  • For repeat buyers, the average difference between prices paid for newly acquired homes versus prices received for the homes they sold was: $28,500.
  • The percentage of these repeat buyers who purchased a home with a lower price than the one they sold: 38%.
  • The percentage of repeat buyers who “move sideways”  — that is bought and sold a house at around the same price: 1%.
  • The percentage of buyers who “moved up” — i.e., bought a more expensive house: 61%.
    • One mortgage feature that is routinely undervalued is a competitive port and increase option. If there’s a reasonable chance you’ll move and need a bigger mortgage before maturity, then (other things equal) lean towards a lender that provides:
      • the ability to increase the mortgage with no penalty
      • more than 30 days to port the mortgage with no penalty
      • assurance of a competitive rate on any new money that you add to your mortgage
      • no restrictions against refinancing elsewhere (for maximum flexibility)

 

Financing Methods

Some stats on down payments:

  • The average down payment made by homebuyers in the survey: $119,000
    (or about one-third the price of the home).
  • The average down payment made by first-time homebuyers: $67,000
    (or 21% of their average purchase price).

    • Despite the consistency of this number in CAAMP’s reports, this is one stat we can never wrap our head around. RBC found a few years back that only 38% of first-time buyers planned to make a down payment more than 10%. For the last two years, BMO has found the average first-timer’s down payment to be 16-19%. Perhaps it’s a matter of how the question is posed to respondents.
  • Percentage of first-time buyers who put down 20% or less: 62%.
    • This number isn’t as useful as it could be. We’d love to see stats on the number of newbie buyers who put down less than 20% (i.e., the number who needed default insurance or secondary financing above 80% loan-to-value).
  • Percentage of overall buyers who put down 20% or less: 49%.
  • Percentage of buyers who got a loan from a separate financial institution, to form part of their down payment: 1%.
    • Perhaps we’ll see a tiny uptick in this number given that
      • default insurance premiums have been increased for LTVs above 90%
      • cash-back down payments are dead as of July, and
      • parental gifts may not be able to keep pace with rising home prices.

CAAMP assessed what would happen if the minimum down payment were raised to 10% (rather than today’s 5%). It found:

  • The percentage who would have been “definitely not able” to make the purchase was 6%, or 35,000 buyers.
    • If home prices keep shooting for the moon in the GTA/GVA, 35,000 affected buyers may not be enough to convince regulators that raising the minimum down payment is a bad idea.
  • The number who would have been “probably not able” to make the purchase: 80,000.
    • This number is the wildcard. No one knows how many buyers would find a way to scrape together a bigger down payment. Home hunters can get pretty creative. On the other hand, if even half of these people couldn’t buy, and we add that to the above 35,000, then we’re talking about removing over 10% of sales from the market in a given year.

“A 10% down payment requirement would have resulted in a reduction of sales large enough to have tipped many local housing markets into downturns, causing price reductions, which would have caused significant negative consequences for local economies,” says study author and economist Will Dunning.

 

Sources of down payments

  • For overall buyers, percentage of down payment that came from loans and gifts from parents and other family members: 7%.
  • For first-time buyers, percentage that came from loans and gifts from parents and other family members: 18%.
    • This is a noteworthy increase from the 11% figure for 2010-2014 home buyers.
    • Note that Genworth Canada recently found that 28% of its first-time insured buyers used gifted money for part/all of their down payments.
  • For overall buyers, percentage of down payment that came from RRSP withdrawals (typically via the Homebuyers Plan, but not always): 3%.
  • For first-time buyers, percentage that came from RRSP withdrawals (typically via the Homebuyers Plan, but not always): 10%.
  • Percentage of down payment funds that came from credit cards: 0.2%, or $100 million.
    • Default insurers are sometimes criticized because they allow credit card down payments. This stat suggests the risk is far less than some believed. Either way, you can bet your boots that lenders and insurers are underwriting such applications extra carefully. That and insurance premium surcharges help keep credit card down payments a very contained risk.
  • Percentage of down payment funds from overall buyers that came from Tax-Free Savings Accounts: 2%.
  • Percentage of down payment funds from first-time buyers that came from Tax-Free Savings Accounts: 5%.
  • Of buyers who had used funds from an RRSP, percentage who had borrowed money to top up that RRSP: 16%.
  • Number of the 620,000 annual homebuyers who bought their home outright (with no financing on the property): 80,000.

Of purchasers with mortgages:

  • Percentage who chose fixed-rate mortgages: 72%.
    • 51% of Canadians choose a 5-year fixed, Dunning tells CMT.
  • Percentage who chose variable or adjustable rate mortgages: 21%.
    • 6% of mortgagors choose variable rates with terms less than five years.
  • Percentage who chose a hybrid (part fixed and part variable): 7%.
    • Hybrids, which offer valuable interest rate diversification, are perennially the most underrated mortgage term in Canada.

 

The process

Mortgage originations:

  • Percentage of mortgages that were from banks: 52%.
  • Percentage of mortgages that were from brokers: 34%.
    • The remainder of Canadians used credit unions, insurance companies, trust companies and other lenders.
  • First-time buyers are more likely to use mortgage brokers than any other segment. 39% do so.
    • This is a glaring difference from CMHC’s recent estimate (55%). Dunning suggests the number may differ because of how the survey question is asked. “…Many consumers won’t know the difference between a mortgage broker versus a mobile mortgage specialist,” he said. “For that reason our wording is specific, asking about [a] ‘representative from a Canadian bank’…”
  • Percentage of first-time buyers who obtained their mortgage from a bank: 47%.
  • Percentage of buyers who have purchased two or more homes who obtained their mortgage from a bank: 58%.

 

What are they buying?

  • Average price paid by a first-time buyer, from 2013 to present: $308,061.
  • Average price paid by overall buyers, from 2013 to present: $347,361.
  • Percentage of second-time purchasers who ‘moved up’ to a pricier property: 75%.

 

Prices paid by homebuyers vs. their initial planned price:

  • Percentage of buyers whose actual price was 100%-109.9% of their target budget: 19%.
  • Percentage of buyers whose actual price was 110%-119.9% of their target budget: 5%.
  • Percentage of buyers whose actual price was 120% or more of their target budget: 3%.

Resale prices TO-Van vs ROC

This graph above depicts Canada’s two-tier housing market, perhaps as well as any.

 

Percentage of Pre-Approved Amounts That Were Actually Borrowed

  • Actual prices paid were 93% of the buyers’ target maximum budget, on average.
  • Percentage of pre-approved mortgage amounts that were actually borrowed by overall buyers: 76% was utilized.
  • Percentage of pre-approved mortgage amounts that were actually borrowed by first-time buyers: 81% was utilized.
  • Percentage of buyers who borrowed all of their pre-approved mortgage amount: 12%.
  • Percentage of buyers who borrowed more than their pre-approved mortgage amount: 6%.

 

Mortgage Insurance

  • Among overall homebuyers who have mortgages, percentage who report that their mortgage is insured: 55%.
  • Among first-time homebuyers who have mortgages, percentage who report that their mortgage is insured: 63%.

 

Terms for Mortgages (for homes purchased from 2013 to present)

  • Percentage of buyers who chose a term of 1 year: 4%.
  • Percentage of buyers who chose a term of 2 years: 8%.
  • Percentage of buyers who chose a term of 3 years: 9%.
  • Percentage of buyers who chose a term of 4 years: 7%.
  • Percentage of buyers who chose a term of 5 years: 67%.
  • Percentage of buyers who chose a term of 7 years: 1%.
  • Percentage of buyers who chose a term of 10 years: 4%.
  • Percentage of buyers who chose mortgage terms of less than five years: 25%.
  • Percentage of buyers who chose mortgage terms longer than five years: 5%.

 

Amortization Periods for Mortgages (for homes purchased from 2013 to present)

  • Percentage of buyers with amortizations of 25 years: 51%.
  • Percentage of buyers with amortizations of more than 25 years: 14%.
    • In many cases, amortizations over 25 years are underutilized. Paying off a mortgage is frequently not the best use of cash, depending on the borrower’s other opportunities and debts.
  • The average amortization period for overall buyers: 22.1 years.
  • The average amortization period for first-time buyers: 22.7 years.
  • The number of years earlier that borrows expect to pay off their mortgage, ahead of their contracted amortization: 5 years.

 

Average interest rates

  • The average interest rate for homes purchased in 2014: 3.00%.
  • The average interest rate for homes purchased so far in 2015: 2.68%.
    • This reflects the heavy concentration in higher-priced long-term fixed-rate mortgages, and the fact that some folks don’t shop rates as much as they could.
  • Percentage of buyers who gave relatively little consideration to the possibility of interest rates rising in the future: 15%.
    • Stress testing a mortgage is easy and always best practice: Here’s a calculator that can help.
  • Percentage of buyers who gave quite a lot of consideration to the possibility of interest rates rising in the future: 60%.

 

The process

Factors prompting decision to buy

  • Percentage of first-time buyers who were prompted by low interest rates: 25%.
  • Percentage of overall buyers who were prompted by low interest rates: 18%.
    • That’s almost 1 in 5. One can only imagine the reverse impact of a rising rate environment.
  • Among buyers with financing, the average number of mortgage professionals they consulted was: 1.2.
    • This number is too low. It never hurts to get a second opinion, no matter how much you trust your mortgage adviser.
  • Percentage of borrowers who said they did not obtain any rate quotes: 9%.
    • This likely means they accepted the offer from their usual financial institution—a costly decision in the majority of cases. 
  • The average number of quotes received by borrowers was: 1.6.
  • Percentage of mortgage borrowers who consulted with major banks: 76%.
    • For most Canadian mortgage shoppers, banks are still the first stop for person-to-person quotes and mortgage advice.
  • Percentage of mortgage borrowers who consulted with brokers: 56%.

 

Circumstances, Expectations and Opinions

  • Percentage of buyers who were employed full time at the time they bought their house: 69%.
  • Percentage of buyers who were self-employed at the time they bought their house: 5%.
  • Percentage of buyers who were retired at the time they bought their house: 14%.

 

Homebuyers’ Expectations for Interest Rates

  • On a 10-point scale of interest rate expectations, with 10 meaning they are expected to “go up drastically,” the score given by buyers for interest rates in the five years: 6.9.
    • Right or wrong, economists and most commentators continually reinforce this idea of coming rate hikes.

 

Mortgage Market

Here’s an interesting and somewhat unintuitive observation from the report. CAAMP’s Will Dunning notes that very low levels of interest rates mean that Canadians are paying less interest and have more money available to repay their mortgage principal.

“Therefore, a statistical analysis shows that reductions in interest rates in Canada tend to reduce the rate of mortgage credit growth…”  

This applies to today’s market, now that we’re near a purported bottom in rates. Clearly, over the long term, falling rates have had a very real impact on home prices and mortgage volume.


 

By Robert McLister & Steve Huebl

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CMHC consumer survey2015Around this time each year, CMHC releases its Mortgage Consumer Survey, a keenly insightful report for anyone in the mortgage business.

It’s loaded with industry stats, including this year’s headline number: broker market share. CMHC now pegs broker share at 42% of mortgage originations among repeat buyers.

Among the coveted first-time buyer segment, brokers now own the lion’s share (55%) of the market. Last year it was 48%. Lenders who are not in the broker channel, take note of this trend.

But this isn’t all that’s eye catching. Per usual, we’ve combed through this year’s report and yanked out all the other good stuff. If you’re pressed for time, check out the “must-read” data that’s highlighted in red. (The comments in italics are ours.)

 

Online Information Gathering

  • 78% of mortgage consumers turned to various online sources to discover mortgage options and features (unchanged from 2014).
  • Out of that 78%:
    • 67% used an Internet search engine
    • 23% said they found their lender website through online advertising
    • 28% said they found their broker website through online advertising
      (This can include search engine pay-per-click ads, online banner ads, rate comparison sites, etc.)
  • 70% of mortgage consumers who went online used a mortgage calculator.
    • 51% used a calculator from a lender website
    • 16% used a calculator from a broker website
  • Of those using an online mortgage calculator:
    • 62% used one to determine mortgage payments
    • 33% used one to compare mortgages
    • 34% used one to gauge mortgage affordability
  • 17% of mortgage consumers reported using a mobile device.
    • 22% of those used a mortgage-related app
      (As reported last week, comScore found that 88% of a typical smartphone user’s time is spent using apps. Apps are clearly used much less for mortgage shopping than for other things.)

 

Broker Share and use

Broker share continues its upward trend:

  • 42% of mortgage originations among repeat buyers are handled by mortgage brokers.
    • Versus 32% in 2012
      (Among other things, industry advertising initiatives, the media and the internet rate ads may be playing key roles here.)
  • 55% of mortgage originations among first-time buyers are handled by mortgage brokers.
    • Versus 48% in 2012 and 2014
  • 21% of those renewing used the services of a mortgage broker.
    • Versus 23% in 2014
      (This number has still been uptrending over the long term. In 2010 it was 13%.)
  • 79% of recent buyers said they were satisfied with their experience using a broker.
  • 72% said they would likely use their broker again in the future.
  • 73% said they would likely recommend their broker to family or friends.
  • 17% of clients reported changing brokers during the mortgage process.
    • 35% of those said they changed in order to get a better rate
      (This was the number one reason for the switching.)

 

Lender Loyalty and Channel

  • 42% of recent homebuyers used a mobile mortgage specialist to arrange their current mortgage.
  • 79% of recent homebuyers said they were satisfied with their lender experience (same as with brokers).
  • 76% said they would likely use their lender again in the future.
  • 69% said they would likely recommend their lender to family or friends.

Lender satisfaction among recent buyers, by channel:

  • 84%: were satisfied with their mortgage specialist.
  • 77%: were satisfied with their branch rep.

Most mortgage consumers remained loyal to their existing lender:

  • 86% of renewers remained loyal to their existing lender.
  • 77% of repeat buyers remained loyal to their existing lender.
    • Versus 67% in 2014
  • 47% of first-time buyers arranged their mortgage with their primary financial institution.
    • Versus 54% in 2014

Of those who switched lenders:

  • 60% used the services of a mortgage broker.
    (Same as last year.)
  • 63% cited interest rate as their primary reason.
    • Versus 40% in 2014
      (This is a major change in just 12 months, which makes us a bit skeptical. Consumer education, falling rates and the growing prevalence of rate comparison tools may partly contribute to this surge.)

 

Product offering from mortgage professionals

  • 72% of broker clients reported being offered mortgage life insurance.
  • 78% of lender clients reported being offered mortgage life insurance.
    (What this doesn’t tell you is that lender penetration rates are notably greater than brokers’ for creditor life products. Mind you, we’re unaware of good data on this phenomenon. It’s more of an anecdotal observation based on lender and supplier reports.)
  • 48% of broker clients reported being offered a line of credit.
  • 66% of lender clients reported being offered a line of credit.

 

Renewal Process

  • 71% of renewers reported they were notified in advance by their lender that their renewal date was approaching.
    • 67% of those were notified within three months of their scheduled renewal
  • 23% indicated they were contacted in advance by a mortgage broker regarding their upcoming renewal.
  • 60% renewed before their scheduled date.
    (Lenders love to lock up clients early—to keep them from shopping around.)
  • 61% reported they were “totally satisfied” with their decision to renew in advance of their actual renewal date.
  • 55% said their main reason for renewing in advance was to avoid a perceived increase in rates.
  • 19% indicated that the main reason for renewing early was because their mortgage professional convinced them that it was the right decision.
  • 49% of renewers have their mortgage payment set higher than the minimum required payment.

Advising renewal/refi clients to keep mortgage payments at the same level (to reduce their amortization) can lead to a:

  • 66% increase in likelihood of using the same mortgage professional again.
  • 55% increase in client satisfaction.

 

Customer follow-up

  • 50% of mortgage consumers who used a broker were contacted by their mortgage professional following their mortgage transaction.
    • Versus 51% in 2014
  • 34% who used a lender were contacted.
    • Versus 35% in 2014
  • 40% of mortgage consumers “totally agreed” that their post-transaction contact was useful.
    (Are people getting tired of home improvement and gardening tips from their mortgage advisor?)

Types of follow-up contact mortgage consumers would have considered useful:

  • Advice on long-term mortgage financial strategies.
    • 25% of lender clients
    • 32% of broker clients
  • Housing market information.
    • 13% of lender clients
    • 21% of broker clients
  • Information on how to manage financial difficulty.
    • 14% of lender clients
    • 17% of broker clients
  • Investment opportunities.
    • 14% of lender clients
    • 17% of broker clients

 

And perhaps the number-one stat that should leave an impression on any aspiring (or seasoned) broker:

  • Post-transaction contact with clients can increase the likelihood for repeat business by nearly 53%.

 


Survey background: CMHC’s survey was conducted online and polled 3,510 recent mortgage consumers who had undertaken a mortgage transaction in the preceding 12 months. CMHC has conducted this survey since 1999.