Here we go again with dropping mortgage rates
TORONTO • Falling bonds yields could push mortgage rates lower in coming weeks as banks compete in the spring housing market, traditionally the strongest real estate period of the year.
Most new homes are built stick by stick, brick by brick, by a construction crew on-site, but a growing number of Canadians are buying homes right off the factory floor to be assembled on the lot within days
Rob McLister, editor of Canadian Mortgage Trends, reported on his website Monday that Royal Bank of Canada had dropped its deep discounted rate on its fixed, closed five-year mortgage to 3.69%. It was just a 10 basis-point cut, but with the way bond yields have started to drop since the beginning of the year, the question is whether there is more to come.
Royal Bank acknowledged it lowered rates 10 basis points on two-, three- and five-year fixed rate terms. “Rates were lowered to match competitor pricing. Competitors have been pricing at lower rates for several weeks, and this rate change now puts us in line,” said a spokesperson.
“The big banks like to cut only enough to maximize their profits,” said Mr. McLister, who is also the founder of ratespy.com. “The fact is when a big bank changes course like this and cuts it advertised rates generally speaking it’s evidence of further change to come in the short-term.”
He said if you look at the some of the deep discounted rates offered on some sites and add maybe 10 to 15 basis points, you can get a sense of how far you can push your bank in negotiation.
January may seem like a slow month for housing, but since many consumers are pre-approved for a mortgage with a guaranteed rate for as long as 120 days, it’s a prime time for lenders to try to lock down customers.
The talk continues to be of higher rates as the U.S. Federal Reserve signals a scaling back of its bond buying program. Despite the talk, five-year Government of Canada bond yields — on which mortgages are based — have fallen after a recent peak at the end of the summer.
“The five-year Government of Canada bond yield is down roughly 30 basis points since the new year,” said Mr. McLister, noting even a 10- point cut can be meaningful. “A typical first-time borrower might take out a $250,000 mortgage, that’s $1,200 over five years. Not life-changing, but it’s better to have it in your wallet.”
Battling between banks lowered rates to 2.99% for a five-year fixed-rate mortgage last year, a percentage that drew the ire of Jim Flaherty, the finance minister. At that rate, the banks were barely above discounters.
Discounters still have an edge heading into the spring market, as banks have been reluctant to pass on all of the savings in the bond market. Kelvin Mangaroo, president of ratesupermarket.ca, noted the lowest rate for discounters is 3.29% for a five-year mortgage fixed-rate mortgage.
“For months, we haven’t seen a drop [from the banks],” said Mr. Mangaroo, adding discounters have been mostly been holding tight at 3.29% as well. “I think we’ve a significant drop in [bond yields] and in early January we typically see banks going very aggressive as they look to the home-buying season coming up.”
Jim Murphy, chief executive of the Canadian Association of Accredited Mortgage Professionals, said 2013 turned out to be a major year for discounting with the average consumer saving 2.12 percentage on points on a five-year closed fixed-rate mortgage. The average rate for that term was 3.06% while average posted rate for the term was 5.21% in 2013.
“One might say we are entering a busier period for home buying so we will see a more competitive marketplace [in 2014],” Mr. Murphy said.
The other issue for some lenders is trying to make up for ground lost because of skinny margins in 2013, said Wade Stayzer, vice-president of retail and investment services of Meridian, the largest credit union in Ontario.
A shrinking market for housing sales could put its own pressure on the market. “Corporate targets don’t drop when financial forecasts drop. Everybody is out chasing the same mortgage,” said Mr. Stayzer.