GARY MARR (FINANCIAL POST) - If you thought mortgage rates could not go any lower, you were wrong.
Investors Group is rocking the mortgage world with what appears to be the deepest discount in Canadian history on a floating rate loan, offering a deal that takes an effective mortgage rate down to 1.99%.
The company is now offering 101 basis points or 1.01 percentage points off its prime rate of 3% for a variable rate mortgage. Consumers can get the deal for a 36-month term which is shorter than the length offered by some of the major banks on the deep discounted five-year fixed rate mortgage which has dropped to around 3% — a controversial level that once drew the wrath of the department of finance.
“We haven’t seen a rate like this from a lender,” said Rob McLister, founder ofwww.ratespy.com., referring to the steep discount.
The offer from Investors Group is not available from brokers and is coming from the company’s own sources, designed to make a major splash in the marketplace.
“They could have priced this at prime minus 80 and beat everybody in Canada. Obviously, they want to get people’s attention here,” said Mr. McLister, who is also editor of Canadian Mortgage Trends.
Peter Veselinovich, vice-president of banking and mortgages with Investors, said his financial institution was able to set aside a block of funding to be able to offer the cut rate deal.
“This [deal] will be driven by what the appetite is in the marketplace. It’s a limited time offer, it may be there 90 or 120 days or it may be there for 30,” said Mr. Veselinovich, whose company quietly brought in the cut-rate product Monday to bring in new customers for its other offerings. “It’s kind of the best kept secret in the marketplace.”
There are some conditions to the mortgage, namely you cannot break it without selling your home. Nevertheless, the loan does allow consumers to double up monthly payments and pay a lump sum of 15% of the mortgage every year.
The latest salvo in the mortgage rate wars comes in the aftermath of former finance minister Jim Flaherty’s death which happened shortly after he stepped down as finance minister.
Mr. Flaherty had intervened in the market to discourage banks from lowering their mortgage rates below 3% on five-year fixed terms, out of fear it would inflate the housing market.
In March, after new Finance Minister Joe Oliver was sworn in, Bank of Montreal jumped back into the market again with its 2.99% offer for a five-year fixed mortgage. Mr. Oliver has shown no interest in intervening in the market.
“Our Government has taken action in the past to reduce consumer indebtedness and the Government’s exposure to the housing market,” said Mr. Oliver, in a emailed statement to the Financial Post.
“I will continue to monitor the market closely. We took action four times, from 2008 to 2012. Budgets 2013 and 2014 announced additional measures to reduce the government’s exposure to the housing market. We will continue monitoring the market.”
Steeply discounted variable rate mortgages tied to prime which generally moves with the Bank of Canada’s overnight rate could end up pushing Canadians back to floating rate products and leave them vulnerable should interest rates spike.
Ottawa has moved in the past to get consumers to lock in a rate by making it easier to qualify for a fixed-rate mortgage. Consumers are able to use the rate on their loan to qualify for lengths of five years or longer while for variable rates they must meet borrowing standards based on the qualifying rate for five years which stands at a relatively lofty 4.99%.
“A variable rate mortgage or an adjustable rate mortgage is the right rate for a lot of clients,” said Mr. Veselinovich, noting Investors Group is sub 3% on five-year fixed rate deals for people who want to go that route.
The Canadian Association of Accredited Mortgage Professionals in its mortgage survey last year found only 9% of consumers opted for a variable rate or adjustable rate mortgage in 2013. Overall, 26% of consumers have a variable rate product — a percentage that shows how popular that product had been in the past.
Another lingering threat from even lower rates could be ramped up consumer debt which has finally shown signs of finally coming under control.
Royal Bank of Canada said this month residential mortgage growth in March jumped 5.0% from a year ago. It was the fourth consecutive month the growth rate had held steady at 5%.
“We’ve seen debt accumulating in the mortgage market but it is slowing over time,” said Laura Cooper, an economist with the bank. “I’m not sure interest rates are having the same impact now. I think [sub 2% rates] do have the potential for some upside risks.”
OTTAWA — Canadians can expect to enjoy relatively cheap borrowing costs for some time to come — perhaps years — even after the economy returns to full capacity and the Bank of Canada starts hiking interest rates, bank governor Stephen Poloz said Thursday.
The central banker told a luncheon in Saskatoon that the economy has room to grow before it can be considered to be firing on all cylinders, but even when it does — likely sometime in early 2016 — Canadians shouldn’t expect a sudden increase in interest rates to fight inflation.
Because of the aging workforce and particularly because rates have been at super-low levels for years, modest increases will likely be sufficient to achieve the bank’s goal of keeping inflation in check.
“Our economy has room to grow and when we do get home, there is a growing consensus that interest rates will still be lower than we were accustomed to in the past,” he said.
“Both because of our shifting demographics and because after such a long period at such unusually low levels, interest rates won’t need to move as much to have the same impact on the economy.”
The clear statement represents a slight shift of tone for the central bank, which has for years warned households to be mindful of overextending themselves in the housing market because one day interest rates will need to start rising.
Poloz reiterated his belief Thursday that the risks of a housing bubble were subsiding, saying that “we have what looks like a soft landing emerging in housing.”
The Bank of Canada has kept the overnight rate, which impacts short-term borrowing costs, at one per cent since September 2010, but in essence rates have been well below so-called normal levels dating to early 2008.
Some economists speculate the new normal in the bank’s overnight rate will settle in at the 2.25 to 2.5 per cent range, more than a full point or more below pre-recession levels.
The super-low borrowing costs are generally acknowledged to have aided the economy through the 2008-09 crisis and soft recovery — stimulating borrowing and spending among Canadians and businesses — but not without costs, including an overheated housing market and record high levels of household debt. As well, it has been a difficult six years for savers who have realized low yields on investments, and it has made it tough for defined benefit pension plans to cover their liabilities.
In the past, Poloz has hinted that he might have been prepared to cut rates further in an effort to stimulate economic growth if not for fear of encouraging even more borrowing, particularly in the housing market.
Poloz’s speech to the Saskatchewan Trade and Export Partnership touched only briefly on interest rates as the central banker focused on the controversial subject of Canada’s oil exports and their impact on the dollar and central Canada’s manufacturing sector.
Poloz conceded that the strength of resource exports had played a role in the appreciation of the loonie over the past decade. However, while resource-rich regions of the country have benefited the most, all Canadians have shared in the “gift,” he said.
He said the bank’s research has calculated that Canada’s gross domestic income is about seven per cent higher today than it would have been without the improvement in terms of trade brought on by resource exports, particularly oil, since 2002.
(BCREA) Interest Rate – April 16, 2014
The Bank of Canada announced this morning that it is maintaining its target for the overnight rate at 1 per cent.
The Bank’s target rate has now remain unchanged for 29 consecutive meetings. In its accompanying statement, the Bank noted that inflation in Canada remains low and is expected to remain below the Bank’s 2 per cent inflation target this year due to slack in the economy and heightened retail competition. The Bank left is forecast for Canadian economic growth unchanged at 2.5 per cent this year and next, citing a strengthening global economy and ramped up business investment. The Bank also noted that recent developments are in line with the its expectations of a soft landing in the housing market, though elevated household debt remains a risk should economic conditions deteriorate.
While some expected a slightly more dovish note from the Bank given continued muted inflation and a slight rise in the dollar, the Bank remains decidedly neutral. An expected second half rebound in growth and firming inflation means that the next move for interest rates is likely higher, but the timing of that move remains uncertain. Our view remains that the overnight rate will stay at its current level until at least early 2015NeutralWhile some expected a slightly more dovish note from the Bank given continued muted inflation and a slight rise in the dollar, the Bank remains decidedly neutral. An expected second half rebound in growth and firming inflation means that the next move for interest rates is likely higher, but the timing of that move remains uncertain. Our view remains that the overnight rate will stay at its current level until at least early 2015
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