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Royal Bank of Canada, the country’s largest mortgage lender, is offering real estate agents $1,000 for referring five first-time home buyers, as competition among banks for first-time buyers has heated up.
First, here’s the backdrop. Former Finance Minister Jim Flaherty tightened the country’s mortgage insurance rules in July of 2012, in a bid to curb the rapid growth of consumer debt levels (namely mortgages) as well as house prices. One of the changes he made was cutting the maximum amortization of insured mortgages to 25 years, from 30. That move in particular fuelled a steep decline in the number of homes that were being sold, in large part because it knocked a number of potential first-time home buyers out of the market.
Those rule changes (as well as other moves by Ottawa, and increased caution among home buyers) caused the growth of mortgage debt in Canada to decline significantly. It used to grow by 10 per cent or more, but has been falling in the last few years and is now growing at about 5 per cent. There were calls for that to fall to around 2 or 3 per cent this year (although, in part because of all the condos that are being completed this year, it now looks like mortgage credit will continue to grow at about 5 per cent this year). Royal Bank expects the number of existing homes that sell this year to be a bit above 461,000, which is below the ten-year average of 467,000 units.
“If you think about the context of the broad market, and slowing mortgage growth, understanding where there are pockets of opportunity is really important for our business,” says Erica Nielsen, vice-president of home equity financing at RBC. “The first-time home buyer is an opportunity for us.”
Their mortgages can be more lucrative than those of homeowners who have been paying theirs down, and, importantly, banks hope to lock in borrowers early and keep them as customers for life.
Ms. Nielsen says Royal Bank has put more emphasis on pursuing first-time buyers in the last year and a bit. It recently launched an advertising campaign whose main vehicle is YouTube in a bid to attract the attention of first-time buyers.
So why the realtor promotion? “Because (first-time buyers) have never been through the process, they turn to the folks that they would trust and know best, like friends and family … the real estate agents play a role in that decision, and so we feel that’s an important place for us to participate.”
The current $1,000 promotion runs from May 1 to Sept 30. Ms. Nielsen says a similar one was in place last year.
The cash offer is part of Royal Bank’s referral awards program for real estate agents. The program allows agents to collect points for referrals that they can trade for things like plane tickets, merchandise, gift cards or charitable donations.
Royal Bank is not the only lender to have a referral program for agents; a number have created such programs. They are controversial, and provincial watchdogs have differing rules for them. The bank’s program is not active in Alberta and Quebec, and the bank requires all realtors who participate to sign an agreement that includes a paragraph saying they will disclose to the home buyers that they are receiving compensation “in the form required under applicable law.”