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.”
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