Welcome to Mortgage Rundown, a quick take on Canada’s home financing landscape from mortgage strategist Robert McLister.
Now here’s a mortgage I’ve never seen in my 14 years in the business – a mortgage that challenges the “no such thing as a free lunch” adage.
Think Financial, the in-house lender of national discount mortgage broker True North Mortgage, is launching a fully open five-year mortgage starting at just 1.25 per cent (prime rate minus 1.2 per cent). And it has virtually no strings attached.
Think calls it the “No Commitment Mortgage” because you can make any prepayment any time you want – or even break the mortgage contract – with zero penalty.
It’s an ideal fit for someone who’s sitting on the fence and can’t decide which kind of mortgage to get, according to Dan Eisner, True North Mortgage’s chief executive officer.
“Homebuyers experience a lot of emotional stress,” Mr. Eisner said by phone from True North’s headquarters in Calgary. “They’re making numerous decisions like where to live, when to move, what house to purchase, what furniture to buy. They’re stressed and many just don’t want to make a mortgage decision.”
With this mortgage they can decide on a term in six months, a year or any time, he added.
There is no comparable mortgage anywhere in North America. The cheapest open mortgage that I’m aware of is from Manitoba’s Rosenort Credit Union, at 2.2 per cent. Open mortgages from national lenders are well above prime rate, except for Tangerine Bank’s open home equity line of credit at prime minus 0.1 per cent (2.35 per cent).
Think Financial lets you lock in any time to its best fixed or variable rates, which are some of the lowest in the country. With traditional closed variable-rate mortgages, borrowers are offered less competitive fixed rates when they go to lock in. Lenders know borrowers must pay a penalty to leave so those without transparent, everyday low pricing use this as leverage against borrowers.
The No Commitment Mortgage is available on insured and uninsured mortgages, but uninsured rates are about 20 basis points higher, assuming a well-qualified borrower. (There are 100 basis points, or bps, in a percentage point.)
The product is for owner-occupied properties only (sorry, property investors) and it’s technically an adjustable-rate mortgage, meaning its payment floats with prime rate. Mr. Eisner said he couldn’t specify who is funding the mortgage but confirmed it’s a major Canadian financial institution. (Many mortgage finance companies such as Think Financial underwrite mortgages but a bank partner provides the actual funds.)
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The reason no other lenders offer such a mortgage is that it’s simply not as profitable. There’s an “adverse selection” problem with cheap open rates, meaning, in this case, that many/most borrowers use such products as a short-term financing vehicle to the detriment of the lender. This includes those who plan on selling their property in coming months. The lender doesn’t have as much chance to earn interest and offset its costs.
Mr. Eisner said that despite the “limited time offer” wording on its website, regarding the new product, “Hopefully it will be around forever.”
But with a mortgage that’s almost too good to be true, I fear it might not – at least not at today’s discount. So, if you need an open mortgage, get it while it’s hot.
This week in rates
With Canada’s five-year government bond yield up 25 bps since the start of the year, some of the country’s biggest banks took rates higher this week.
Industry bellwether Royal Bank of Canada lifted most of its fixed rates, including its five-year fixed, by 15 bps – its five-year fixed is now 3.09 per cent. RBC also hiked its five-year variable rate five bps to 1.7 per cent (prime rate minus 75 bps). More banks could do the same as variable-rate funding costs tick higher ahead of Bank of Canada rate hikes.
Bank of Nova Scotia also boosted its fixed and variable rates. It’s online eHOME division, which typically leads big banks on advertised rates, lifted five-year fixed and variable rates by 10 bps.
HSBC’s insured 0.99-per-cent variable offer, which has been around for more than a year, remains Canada’s lowest nationally available rate.
Last but not least, five-year fixed reverse mortgage rates are now all above 5 per cent. That’s up from the record bottom in 2020, when they dropped as low as 3.49 per cent.
Rates in the table are as of January 12, 2022 from providers that lend in at least nine provinces and advertise rates on their websites. Insured rates apply to those buying with a down payment of less than 20 per cent, or those switching a pre-existing insured mortgage to a new lender. Uninsured rates apply to refinances and purchases of more than $1-million and may include applicable lender rate premiums.
This and that
- Prepare for lift-off: Despite the Bank of Canada telling people it’ll likely hike rates in the “middle quarters of 2022,” the market doesn’t buy it. It’s now more likely than not that the central bank will hike mortgage rates at its next meeting in just two weeks. That’s according to implied rates in the bond market, as tracked by Refinitiv Eikon. Most economists are still calling for the first hike March 2 or April 13, after coronavirus restrictions are lifted. But bank CEOs such as RBC’s Dave McKay are suddenly urging the Bank of Canada to take “rapid action” to lift rates and contain inflation. This week, economists at JPMorgan said they expect the bank to raise its benchmark rate at its Jan. 26 meeting. The market currently projects the bank’s overnight rate will ultimately end up between 175 and 200 bps higher before levelling off.
- Brokers now have Toronto-Dominion Bank’s HELOC: For the first time, TD Canada Trust now offers its readvanceable mortgage through mortgage brokers. It’s called the TD FlexLine and it’s got a mortgage linked to a revolving credit line. As you pay down the mortgage portion, available credit in the credit line portion immediately increases. If you decide to get one, compare best offers from both a TD mortgage adviser and a TD-approved mortgage broker.
- FWIW: The man behind Canada’s seminal research on the benefits of variable-rate mortgages, York University professor Moshe Milevsky, suggested on Twitter that his 20-year old research may not be as applicable today. “Today I would probably go fixed,” he said on Dec. 15.
Robert McLister is an interest rate analyst, mortgage strategist and columnist. You can follow him on Twitter at @RobMcLister.