Is it too late for the Department of Finance to get their foot out of their mouth?

The mortgage world is preparing for battle today, as rates continue to drop to record lows.  The banks expected a war with each other, but not with the Department of Finance.  Manulife Bank of Canada made and aggressive move and dropped their 5 year fixed rate to 2.89%, only to have it stopped after a phone call from Jim Flaherty.

Our Finance Minister is trying to put a halt to 'aggressive' and 'irresponsible' lending, and is concerned at Canadians' rising levels of debt.  However, mortgage insiders find it funny that the low rates were prompted by him in the first place, in attempts to keep the housing market from overheating.  He implemented some changes to the lending rules, which was a smart move on his behalf.  He successfully filtered out buyers from those who should, and those who could.  By tightening the rules, it was more difficult for buyers to qualify, which was his way of ensuring that people were not overspending, and that buyers were able to financially handle the burdens of having a mortgage.

Last year, when major banks aggressively dropped their rates, we found ourselves in the midst of a mortgage war - everyone was trying to offer the lower rates.  The war was between the major banks, and oligopolized against independent mortgage brokers.  At the time, lenders in the broker channel were unable to compete with what the bigger banks were doing.  Now that the low rates have been offered for a while, the broker channel was able to offer the same rates.  However, the Finance Minister can make calls to major banks like Manulife, but he cannot sit and call each independent mortgage broker with the same warnings.

Mortgage brokers felt the wrath last year, and are increasing the levels of competition.  A mortgage broker that I have worked with is currently offering a 2.79% 5 year fixed rate.  Mortgage brokers are sometimes allowed to waive portions of their commission in order to provide a lower rate - in other words, they buy down the rate.  This is what they have to do in order to compete with the large banks, after last year's dominance.

On many levels, this kind of competition is not only expected, but it's healthy.  As a Realtor, I want my clients to get the best deal, and the best product.  I don't worry about my clients overspending, or taking on burdens that they can't financially handle.  I'm very familiar with the lending process and criteria, and I am confident that it ensures people are in the right financial state to carry a mortgage.  I think the Department of Finance is micro managing by making calls like this, and I think that the professionals know what they are doing, and moreover, the Canadian buyers know what they're doing.

Since When Was Offering Consumers The Best Rate A Bad Thing?

As the record low mortgage rates are coming to an end, the age old feud between visiting your bank for a mortgage or utilizing the services of a broker are being fuelled by the media and rates.  Above all, what we really need to look at is what is best for the client.  The National Post printed an article today, Mortgage Brokers Undercut Banks, in which they start the article with "Mortgage brokers are once again undercutting the banks and some are willing to buy down your rate — eating part of their commission in the process — to gain customers."  I'm sorry, I must have missed the part where offering the consumer the best possible rate - even if it means sacrificing your own pay - was a bad thing?  


The perception of Mortgage Brokers has changed.  Ten years ago, having to use a mortgage broker meant that you had less than perfect credit, and weak income.  Today, using a broker means that you are  somewhat financially savvy, and are looking at the best ways to save some money.  It means that you are shopping your mortgage, wanting to find the best rate and product.  When shopping your mortgage, you can either go with a big bank, or through the broker channel.  


The broker channel consists of over 40 different lenders Canada wide.  These are financial institutions that do not have savings/chequing accounts.  They do not have a walk in branch, which is why they can often offer lower rates - they are not paying employees to sit in a branch.  Instead, they pay mortgage professionals a commission to facilitate mortgages. Mortgage professionals are not paid by the consumer, they are paid by the lender.  To me, this means that they are willing to work even harder to offer you the best possible service they can.

A few weeks ago, when BMO slashed their rate to record lows, the other major banks followed.  They oligopolized the mortgage industry by offering these rates, and advertising til no end.  The broker channel suffered, unable to compete with the big banks.  Though it was a slower response, the mortgage broker channel caught up with competitive rates and products, allowing them to battle the large banks.  Now that the major banks have hiked up their rates, the broker channel can still offer the 2.99%, 2.89%, etc...  Mortgage brokers also have more discretion in 'buying down' a rate - which means that they can waive portions of their own commission to offer better rates.  Apparently, this is a bad thing?


Essentially, it's up to the consumer.  Some people feel more comfortable having all of their accounts with one bank, and will always stay loyal to their branch.  Others would rather shop their mortgage and find better rates and products.  A little healthy competition is fine, just don't lose sight of what's best for the consumer.

Mortgage Rates - Banks Fight the War, Consumer Wins the Battle

BMO announced a half point drop on their 5 year fixed rate this past Thursday.  This is a record low for Canada, and has sparked a craze for the market.  They are offering the program for a two week period in hopes to drive in new business.  Since then, major banks have followed suit, creating a gas industry affect.

What does this mean to the average homeowner, investor, and buyer?
If you are a current mortgage holder, I highly recommend you assess the state of your mortgage.  The average mortgage in Canada DOES NOT go to term - most people refinance, sell, or switch within 3-4 years of a 5 year term.  Ask yourself a few questions; am I looking to a) get a better rate; b) pay my mortgage off quicker; or c) lower my monthly mortgage amount to free up some cash.  With rates this low, you may be able to reap benefits of all of the above.  Most banks penalty policies are the same, whichever amount is higher - 3 months of interest, or the interest rate differential for the remainder of your term (if your current rate is 5% and today's rate is 3%, the interest differential is 2%).  It's virtually impossible to calculate this on your own, so, STEP 1 is to call your bank and find out what your penalty is.  Call them, do not inquire online.  Go ahead and tell them that you are considering refinancing because the rate drop is all over the news.  I can guarantee you they have had numerous meetings within the past day regarding client retention.  Play the game with them.  The worst case scenario can also be the best case scenario - they offer to match the competitor's rate, and you stay with them avoiding legal fees and potential inspection and assessment fees.

STEP 2 is to think about how much money you'd like to borrow.  For a refinance, you can have a minimum of 85% loan to value ( ie. $100,000 home, you are only allowed to refinance $85,000).  If you have more room to play with (ie. $100,000 home with only $50,000 owing, therefore a loan to value of 50%), you may want to consider taking out some of the equity on your home to pay off existing debts.  With rates 2.99%, you are better off borrowing more money with that low of a rate to pay off credit cards, car loans, or lines of credit that are higher than 2.99%.  This is how you can free up some cash by taking advantage of low mortgage rates.

STEP 3 is to decide where you want to go.  Since a lot of banks are following suit, and more will follow, decide where you'd like to take your mortgage.  Some banks are offering 2.99% on a 4 year term, 2.89 on a 3 year term, some are even offering 2.99% on a 6 MONTH TERM (**note, this is amazing for investors).  Look at what pre-payment privileges they are offering, the compounding term, and penalties.

You may also want to give it a few days, see what other banks are putting in place to battle this - they can fight the war, and you can win the battle.