Garry Marr
Sun
The fix is in, when it comes to the Canadian mortgage market.
New government rules, which kicked in this week, have taken away choice from many Canadians and will force them to lock into a long-term mortgage.
You’ll hear a chorus from commentators who will say this is a good thing because Canadians can be assured of their mortgage payments over the next five years — especially important as the Bank of Canada looks set to raise its key lending rate in June or July. An increase in prime will immediately follow and that will raise the cost of borrowing for anybody with a variable rate product.
What nobody is talking about is how the discount on variable rate products has shrunk considerably. Prime is 2.25% but some light negotiation will easily get you 50 basis points off taking your variable down to 1.75% today.
Credit markets have calmed and the cost of capital on short-term money has shrunk to the point where discounts are heading down. At the height of the credit crisis, consumers were paying 100 basis points above prime for a variable-rate product. At the best of times, variable rates have been almost 90 points below prime.
Canadians are not stupid. They know variable-rate products do better almost 90% of the time, even though they do come with increased risk. They also know that in the past two weeks the five-year fixed-rate mortgage has risen 85 points, meaning even discounters can only get you something in the 4.6% range if you decide to lock in for five years.
“The last few days, we have been seeing people go back into variable-rate product,” says Paula Roberts, a mortgage broker with Mortgage Intelligence. “They know they can get 1.75%.”
The problem is the new government rules are taking away the variable option for some consumers — up to 10% of the market, according to some people in the mortgage industry. Ottawa’s new rules mean even those with variable mortgages have to qualify based on their ability to pay the posted five-year fixed rate, now 6.1%. The only way you can use the rate on your contract for qualifying is to lock into a term for five years or longer.
Mark Herman, a Calgarybased broker with Mortgage Alliance figures anybody getting a variable-rate product is going to qualify for 10% to 15% less debt because of the changes.
CIBC World Markets economist Benjamin Tal said recent interest rate moves mean the argument is swinging back to variable. “A few weeks ago, fixing was a no-brainer. Now if you go for five years, there will not be that much difference because you will be ahead for the first two-and-a-half years, just without the stomach ache.”
Locking in can, as the industry likes to say, help you sleep at night. It’s like an insurance policy. But do we make people buy life insurance, disability insurance and critical care insurance — all of which the consumer planning for the unthinkable should have?
In a cruel irony, the policy and the drive by the banks to get everybody into five years might be responsible for driving up rates, Mr. Tal says. Because of all the money going into long-term mortgages, banks are selling more long-term bonds. The flood of paper is creating increased supply and driving down bond prices, which means an increase in yields. The banks then have to raise their mortgages rates to match what is going on in the bond market.
John Turner, director of mortgages with Bank of Montreal, says it’s not that simple. “There are too many other factors at play,” he says about the Canadian push into five-year products driving up rates. “We are dealing with a global market.”
His bank is behind that new commercial you keep hearing, “does your variable need fixing,” but he’ll tell you not everybody needs to go into a fixed rate mortgage.
“If you speak to one of our specialists, we’ll stress test your mortgage,” he says, meaning they’ll see how much of a hike you could actually deal with based on your present mortgage obligation.
There is no question that many consumers are happy to go with a fixed-rate mortgage and pay tens of thousands of dollars of extra interest for the security of having their rate stay fixed for five years.
But what about the people who still want to choose? Some of them will be out of luck. If short-term rates rise quickly, the government protected them. If they don’t, the federal government will have cost them a bundle.
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