Home Capital's Oaken Financial announces major cuts in GIC rates

The attractive yields that Home Capital Group Inc. has been offering on its suite of guaranteed investment certificates will soon be no more: The alternative mortgage lender is dialling back its GIC rates next week, in a sign of improving confidence for the company.

Its Oaken Financial division has been tantalizing investors with GIC rates that were well-above most other Canadian GIC issuers, especially the large banks, after Home Capital investors and depositors lost confidence in the lender earlier this year.

Five-year GIC rates spiked as high as 3.25 per cent, and even one-year rates rose to a high of 2.75 per cent, before declining recently.

At the close of business on Friday, though, rates will return to what Oaken calls "normal levels": The five-year rate will fall to 2.75 per cent from 3 per cent currently, and the one-year rate will fall to 1.9 per cent from 2.5 per cent currently.

The return to normal follows a tumultuous period for Home Capital. In April, depositors fled its high-interest savings accounts following allegations by the Ontario Securities Commission that management had failed to properly disclose an investigation into mortgage broker fraud.

GIC deposits also fell, even though Canada Deposit Insurance Corp. guarantees deposits up to $100,000, raising questions about how Home Capital would fund its substantial mortgage-lending business. The higher GIC rates were designed to attract depositors back to Home Capital.

The strategy, which coincided with new management, a financial lifeline and the addition of Warren Buffett as the company's largest investor, appears to have worked: The lower rates on GICs suggest that Home Capital has emerged from its crisis and no longer needs to entice depositors with rates that are out of line with the rest of the market.

The announcement of lower GIC rates also precedes a key vote on Tuesday, when Home Capital shareholders will decide whether Mr. Buffett's Berkshire Hathaway will be allowed to buy another batch of shares at a steep discount to the current share price.

If Mr. Buffett succeeds, Home Capital will receive more cash. However, some observers believe the company no longer needs the money, given its healthier coffers.

Curiously, the rates on Oaken GICs are falling despite an environment of rising interest rates. The Bank of Canada has raised its key interest rate twice since July, in response to stronger-than-expected economic activity.

While lenders have responded to the rate hikes with higher prime lending rates, they have not yet raised rates an equivalent amount on savings accounts or GICs.

Mr. Buffett's first investment in Home Capital, in June, gave him more than 16 million shares at $9.55 each. Based on Monday's closing price of $14.08, he is already up more than 47 per cent, or about $72.7-million.

On Tuesday, shareholders will vote on whether Mr. Buffett can buy an additional 24 million shares priced at $10.30 each.