Mortgage Price War Brewing Between Canada’s Banks
In a surprise that few experts saw coming, the Bank of Canada recently decided to cut interest rates. Before the decision was announced, most industry experts predicted that interest rates were going to hold or even increase moderately by the end of 2015. In light of the Bank of Canada’s decision, RBC promptly lowered its five-year fixed rate for qualified borrowers (to 2.84%), which started a wave of rate cuts from other major banks such as ScotiaBank, TD, and the National Bank of Canada. Those major banks who haven’t yet dropped their interest rates will soon be forced to do so to stay competitive.
A battle in the mortgage market seemed inevitable given the other extraneous circumstances that influence the housing market. To name a few, plunging oil prices and related job/economic losses, near-record-high house prices in major Canadian markets, recently-tightened mortgage lending regulations, and the increasing burden of rising household debt all make it difficult for new buyers to afford to jump into the market despite already historic low mortgage rates. The Bank of Canada’s decision to cut interest rates, and the resulting mortgage price war that has already started, is a win for home buyers due to the decreased cost of borrowing mortgage funds. However, with a lower-than-normal inventory of houses for sale, and the fact that first time buyers account for 40% of the buyer pool, many home buyers are still faced with a highly competitive real estate market that requires buyers paying top dollar with minimal conditions in order to get into the market.
“Home Hunting? Bad Credit? Not a Problem: Buyers Are Turning To Alternative Lenders
As a result of the aforementioned recently-tightened mortgage lending regulations, more and more Ontarians are turning to non-traditional lenders to assist with their mortgage needs. While the mortgage market from alternative institutions make up only approximately 2.2% of the market, this market share has grown from 0.8% since 2008-2009, expanding at a rate of roughly 25% per year. Strict government regulations have limited opportunities for many potential borrowers, including people with poor credit, the recently divorced, and self-employed individuals who draw a smaller income from their business for income tax purposes. Alternative lenders are stepping up to take advantage of this niche market by catering to these individuals who are brushed aside by traditional banks under the new and tighter lending regulations.
These non-traditional lending institutions can give someone whose credit kept them from qualifying for a bank mortgage the chance to rebuild their rating, although at a higher interest rate. Accordingly for home buyers, the ideal service to receive from an alternative lender is usually a short-term solution where these buyers try to improve their credit ratings to eventually earn a lower rate, sometimes with a traditional bank. As a caution for those considering a mortgage through a non-traditional lender, it is essential to always be vigilant. In addition to a higher interest rate, mortgages from alternative lenders can also vary in their conditions, privileges, and penalties, so always be sure to read the fine print and ask any questions you may have to your mortgage broker/agent.
Sources: The Globe & Mail, CMHC, Bank of Canada, Huffington Post Canada