Why Aren’t Average Incomes Rising More Rapidly?
August 21, 2017The Bank of Canada Raises Rates Again and Speculation Grows That It May Not Be Done Yet
September 11, 2017
Last Thursday I was interviewed by Jon Erlichman on the Business News Network about the current state of the mortgage market. (You can watch the video here.)
In the interview I explained that the mortgage-rule changes made in the fall of 2016 have limited the number of competitive offerings that are available through monoline lenders who, unlike banks and credit unions, specialize only in mortgages and don’t have cash-rich balance sheets.
As a reminder, on November 30, 2016, refinances, properties with purchase prices of more than $1 million, and single-unit rental properties all became ineligible for default-insurance coverage.
These changes significantly reduced the types of mortgages that monolines could offer because their business models were built by securitizing mortgages through third parties like the Canada Mortgage Bond (CMB) Program, which require all of their loans to be default insured. At the same time, the changes left some of what I called “the greenest grass” for banks and credit unions, who don’t need to securitize their mortgages and can fund them with their balance sheets instead.
That being the case, the next logical question for anyone in the market for a mortgage is, if monoline lenders aren’t as competitive today as they used to be, should I still shop around to see what they have to offer or should I just go with my own bank?
To answer that question, today’s post will provide a summary of which type of lender is typically offering the best value to the three different segments of mortgage borrowers that were created by last fall’s mortgage rule changes.
- High-ratio borrowers
Borrowers who are making down payments of less than 20% of their purchase price must pay for mortgage-default insurance, but once they do, they have access to the lowest rates available. (While that may sound counterintuitive, one of my previous posts explains why smaller down payments come with lower mortgage rates.)
The high-ratio segment of the market is as competitive as ever and monolines typically offer these borrowers the most aggressively priced options. As an added bonus, monoline mortgage contracts also typically come with excellent terms and conditions, and they can have a big impact on your total borrowing cost over the term of your loan. (This post outlines the key fine print details to watch for.)
For example, high-ratio five-year fixed-rate mortgages can be found today at rates as low as 2.64% and five-year variable rates can be found at rates as low as 2.05%. (Both rates are offered by different monoline lenders).
- Number of my lenders who were competitive in this segment prior to the last round of mortgage rule changes: 25
- Number of my lenders who remain competitive in this segment after the last round of mortgage rule changes: 25
- Low-ratio borrowers who are buying for less than $1 million
Borrowers who are making down payments of more than 20% of their purchase price and who are buying for less than $1 million also enjoy a wide range of lenders competing for their business because these mortgages can still be default insured, although in these cases the lender typically pays the premium instead of the borrower.
Monolines usually have the most competitively priced offerings for this segment of borrowers, and their low-ratio mortgages also come with excellent terms and conditions.
Today, low-ratio borrowers who are buying for less than $1 million can find five-year fixed-rate mortgages at rates as low as 2.69% and five-year variable rates as low as 2.15%. (Again, both of these rates are also offered by different monoline lenders).
- Number of my lenders who were competitive in this segment prior to the last round of mortgage rule changes: 25
- Number of my lenders who remain competitive in this segment after the last round of mortgage rule changes: 25
- Borrowers who are refinancing, buying for more than $1 million, or investing a single-unit rental-property.
These borrowers have fewer lenders competing for their business than before the rule changes because their mortgages can no longer be default insured. But they still have access to a wide range of options and there are still significant differences in the terms and conditions offered by the most competitively priced lenders. For example, the Big Six banks charge fixed-rate mortgage penalties that are often as much as five times higher than what their competition charges (which this post explains in detail).
Today, borrowers who fall into this third category can expect five-year fixed mortgage rates in the 2.99% to 3.09% range and five-year variable mortgage rates in the 2.20% to 2.55% range (with the lowest rates offered by banks and credit unions).
- Number of my lenders who were competitive in this segment prior to the last round of mortgage rule changes: 20
- Number of my lenders who remain competitive in this segment after the last round of mortgage rule changes: 10
It is also worth pointing out that not all bank mortgages are the same. When shopping for the best mortgage deal in any mortgage category, one can’t really evaluate a deal from one’s own bank until it is compared to offerings from the other banks as well as the non-bank alternatives.
Although the three segments outlined above capture most of the market, there are other subsets of borrowers as well. For example, renewers who just want to roll over their mortgage balance should still find a broad set of competitively-priced lenders, and borrowers who need to access more flexible, non-prime lenders shouldn’t be impacted at all.
While it’s true that monoline lenders have had to restrict their offerings or raise their uninsured pricing on some of their offerings for the time being, as I mentioned in the interview, they are a resilient group and all of them are actively seeking out new funding sources that will allow them to compete more aggressively for this business.
My bet is that it won’t be long before they get it figured out.
Five-year Government of Canada bond yields rose five basis points last week, closing at 1.54% on Friday. I’ve given a detailed pricing summary above so I won’t repeat my usual range of five-year fixed and variable rates here except to highlight my current Deal of the Week, which offers a five-year fixed rate to high-ratio borrowers at 2.64%.
The Bottom Line: The last round of mortgage rule changes altered the mortgage landscape when it made refinances, purchases of more than $1 million, and single-unit rental-properties ineligible for default-insurance coverage. While this tilted part of the playing field in favour of balance-sheet lenders, affected borrowers should continue to shop around because there is still a wide range of solutions available, and terms and conditions that have the potential to significantly impact the total cost of borrower’s mortgage can vary widely. Bluntly put, if you do your homework, you are still likely to be rewarded.