This article was updated May 16, 2018
It’s getting more confusing these days for consumers to understand how to read the mortgage market and a big part of that is driven by competition. A few weeks ago, TD Bank jacked up the rate on its five-year fixed mortgage by almost half a percentage point to 5.59 per cent. The other banks have followed suit in raising their rates pretty much across the board, but not to the same extent.
Then BMO came out this week with a teaser rate (available just to the end of the month) of just 2.45 per cent on its five-year variable rate, which adds up to a full percentage point off the bank’s prime rate. (Update: TD announced in mid-May that its five-year variable closed rate will be lowered to to 2.45 per cent, or 1.15 per cent lower than its TD Mortgage Prime rate, until May 31.)
Do you grab the variable low rate knowing it’s going to head back up? That depends on where you think rates are headed next.
Do you go for the fixed rate because you want to lock in and figure you can negotiate a discount to what the banks are posting? Depends on how much of discount you can find off of the posted five-year fixed rate. And if you think central banks will soon be chopping rates again, which will make variable rates the place to be.
And what about the new Mortgage Qualifying Rate? The MQR, introduced last year, is something mortgage shoppers or renewers never had to consider before last year’s move by regulators and the Bank of Canada to tighten lending requirements in order to cool the housing bubble. This new rate is taken off a calculation that takes all the big banks’ posted five-year rates and finds a middle ground. The banks are supposed to take that number, roughly an average of all the banks, then add 200 basis points (two percentage points) on top of it, then see if the mortgage shopper can handle payments at that higher rate. If the applicants can’t, then they don’t qualify for the mortgage.
The added layer of confusion for mortgage shoppers comes from the fact you can’t always guess where the MQR is going to land when the banks aren’t posting rates at the same levels and they keep changing them. But if you mistakenly tried to take your MQR based on TD’s posted rate of 5.59 per cent (meaning you’d have to be able to handle payments based on rates of 7.59 per cent), that is quite different from other banks who are posting their five-year fixed closer to 5 per cent. The Bank of Canada officially raised the MQR this week to 5.34 per cent from 5.14 per cent. So regardless of outlier rates or short-term discounts that is the rate on which you are qualifying.
One factor driving BMO’s promise of a full percentage point off the five-year variable rate is transparency, which the bank figures will help it compete with alternative lenders who aren’t bound by the same lending restrictions, experts say. In a sense the banks are playing the alternative lenders’ game, with attention-grabbing short-term special rates, so consumers know they can easily get less than a higher posted rate.
“There’s a lot of competition out there now from alternative lenders who don’t have to meet the mortgage stress tests as well as by online brokers,” says Justin Thouin, CEO of LowestRates.ca. “BMO is seeing that unless they offer these lower rates, their mortgage business will suffer.”
Mortgage expert Robert McLister of ratespy.com agrees, adding, “you’ve seen rising interest rates and mortgage rates, HSBC continuously undercutting the Big Banks, online and alternative lenders offering cheaper options as well as buyers who are smarter and negotiating harder. And we haven’t remotely seen how competitive it can get online.”
All this means just one thing. “The longer-term trend over the next few years is that mortgage markets will continue to get more competitive.”
It’s because of all those factors that Thouin maintains that while BMO’s rate of 2.45 per cent is a good one, most Canadians should have been able to get that all along. (And remember, a short-term teaser rate isn’t the rate the banks are going to use to see if you pass the stress test for a specific mortgage.) “Canadians have to realize that the mortgage rates the banks are offering aren’t what they should settle for,” says Thouin. “Right now, there are a lot of alternative lenders offering rates less than 2.45% five-year variable rate now.”
For instance, Sigma Mortgage is offering a 2.16 per cent variable closed (five-year term) while True North Mortgage is offering 2.21 per cent. And consumers are wising up. Ratespy.com’s McLister adds that four out of 10 mortgage seekers consult online lenders now but predicts that in five years it will be closer to 8 or 9 out of 10.
“While the banks will try to maintain their margins, they will have to negotiate,” says McLister. And because the mortgage rates banks advertise often isn’t the actual rate available (you can often get lower rates if you go in and negotiate with them) this makes BMO’s move to post the rock-bottom discount rate of 2.45% right on their website even more significant in that it gives consumers a better idea of what they can ask for.
“Hats off to BMO for posting it right on their site,” says McLister. “Kudos to them.” The game is on.
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- The people who bought at the peak of Toronto’s real estate bubble, and then lost hundreds of thousands within months