For years, major banks have typically advertised mortgage interest rates higher than their bottom line, best rate. Depending on a customer’s credit history and debt ratio, there was still room to negotiate a lower rate. According to the Canadian Association of Accredited Mortgage Professionals, in 2011 the average Canadian’s discount on a 5-year fixed term was 1.46 percentage points lower than the posted rate.
Although mortgage rates continue to hover at historical lows, in January major lender BMO made a bold move, creating excitement in the market by being transparent and advertising their lowest, best rates. To keep in line with the BMO marketing ploy, other institutions were forced to react by also posting lower, more aggressive rates.
“Typically banks are very secretive regarding the interest rates they are able to offer their clients,” says Doug Adlam, Mortgage Agent for Champion Mortgage Inc. in Guelph. “Traditionally blinding customers with a ‘posted rate’ and offering verbal ‘unpublished specials’, the big banks have surprised the entire mortgage industry by introducing this new concept of transparency.”
“The big banks are now prominently displaying their rate specials, flaunting 2.99% for four and five year terms, and rates as low as 3.99% for ten years,” adds Adlam. “This public ‘rate war’ between the big banks started back in January, and we are now about half way through the second phase, with the time limited ‘specials’ ending at the end of March.”
As this round of specials comes to an end it is unclear whether banks will continue to be transparent with their rates, or whether they will hide them behind their inflated ‘posted rates’ once again. If supply for housing increases, banks may very well pull back on the transparency.
With the goal of minimizing risk to the economy from record-high levels of household debt, The Office of the Superintendent of Financial Institutions wants lenders to be more transparent about their mortgage businesses.
OSFI has been reviewing bank’s residential mortgage portfolios for over a year. Recently the banking regulator released draft guidelines which call for increased disclosure by banks of their exposure to certain mortgage products and markets, and enhanced risk-management practices. It also demanded that banks treat home equity lines of credit the same way as mortgages.
OSFI wants banks to disclose details to the public such as the amount and percentage of total residential mortgage loans and home equity lines of credit that are insured versus uninsured. Plus, it wants the public to be aware of the percentages that fall within the various amortization ranges as well as the average loan-to-value ratio for certain mortgages and their geographical breakdown.
OSFI’s guidelines apply to all federally regulated financial institutions that are involved in residential mortgages and, in some cases, mortgage default insurance in Canada and abroad. Parties have until May 1 to comment on the draft.
Canada’s household debt-to-income ratio hit a record high of 1451.9 percent last year, mostly the result of mortgage borrowing. Some policymarkers are concerned that the recent cheap debt is inviting even larger bids on homes that will be unaffordable when rates rise. However, Adlam finds most of his clients are using the low rates to their advantage.
“While I am seeing some people ‘trading up’, the majority are taking advantage of refinancing into lower rates to help pay off their mortgage faster and in many situations taking years off of their mortgage. The other group of people who are taking advantage of these historic low rates are definitely first time home buyers.”
While advertised rates may climb as we approach the summer buying season, speak to your mortgage broker about specials that may continue to be offered long after the bank’s marketing dollars run out.
Source: Grummet, Heather (March 30 – April 5, 2012 ). Mortgage rates that seem too good to pass up. Guelph & District Association of REALTORS ® REAL ESTATE UPDATE, page 18, www.gdar.ca.