Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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Investor’s Group yesterday announced that they are introducing 101 basis points discount over prime rate on three years variable rate mortgages. That translates to 3% (Prime) minus 1.01% equals to 1.99% interest rate for three years – provided that prime rate does not change.

Before 2010, Prime -1% mortgage rate was available for variable rate borrowers. Slowly the discount started to disappear in the following years. By the end of 2013 the discounts started to grow back again. 0.65% discount was considered as a good variable-rate product.

1.99% variable rate is back in CanadaWith the new offer from IG, the bottom line of variable-rate is now set even lower. We have been thinking for a while that the rates cannot go any lower. IG’s latest deal proved us wrong again. Also it caught us off guard.

The company offers mortgage through its own sales channel. The product (or anything similar) is not available through broker channel or conventional banks mortgage specialists yet. As of now Canadian big banks are yet to come up with alternatives to this offer.

It is beyond any doubt that such rate will save homeowners a significant amount of money by the end of the contract.

On a $400,000 mortgage at homeowner will be saving close to $1900 every year while compared to 2.35% variable-rate.

This offer raises many questions. Some of them are political and some of them are financial.

Department of Finance has been watching the market closely  according to our finance minister. Rate war between banks is the last thing Ministry of Finance wants. The fear is – lower rates will overheat the already hot housing market.

In past Bank of Montréal pulled search surprises on fixed-rate mortgages. Beginning of 2013 it offered 2.99% on a five years fixed rate mortgage. Then Minister of finance Late Jim Flaherty objected to this lowball rate game. Low rates such as this may spark renewed borrowing spree among consumers.

Financially, this move must be a very brave move. The offer may not last long but it must have a tactical reason for the company to come up with such an offer. With inflation standing at 1.3%, a mortgage rate of 2% cannot be justified unless it is used as a marketing tool.

bond-yield-vs-qualifying-rate

A borrower is required to be qualified under Bank of Canada posted qualifying rate to get a variable rate mortgage. Interestingly enough the qualifying rate has been silently falling for the last few months. As of today the qualifying rate stands at 4.79%, which is the lowest rate in last four years. Or should we say since its inception?

With all these rate cuts spanning from fixed-rate to qualifying rate and variable-rate may signal that the intent of regulating the homeowners mortgage market may have been overwhelmed by the market competition.

With the investors appetite growing every year the banks are forced to invent ways to make more money. The financial institutions survive on lending money. When the market is stagnant or running low in demand side they will always come up with colorful ideas.

We don’t expect the government to make any rash move on this matter. What remains to be seen that if mortgage brokers – and the other big lenders – will be following IG’s lead or not.

Will they all succumb to the pressure or they will hold on to the current offerings? For the time being of course.