Less than a month after the Bank of Canada's surprise interest-rate cut, a renewed mortgage-rate war is in full swing. But, this time, it's being driven by an unlikely source: smaller lenders.
Even as Canada's big banks have cut rates to near three-year lows, small credit unions and mortgage brokers are going a step further, sacrificing profits in a fierce bid for new business.
Only weeks after the country's banks began offering eye-popping specials such as 2.84-per-cent five-year fixed mortgages, the average discounted five-year rate offered by the Big Six banks now sits around 2.79 per cent, driving the spread between the bank's posted rates and the rates that customers actually pay to levels not seen since 2012.
But in a cutthroat move to grow their share of mortgage originations, many smaller lenders and brokers are offering deep discounts off the banks' already low rates. Several online brokerages are offering variable mortgages with rates below 2 per cent and five-year fixed mortgages as low as 2.39 per cent.
The battle for customers comes after the central bank dropped its benchmark rate last month to 0.75 per cent – and amid speculation of deeper cuts in the months ahead.
Concerns are mounting that low mortgage rates will add fuel to an overheated housing market and add pressure to an economy struggling with rising household debt.Earlier this month, North Peace Savings and Credit Union, a small credit union in extreme northeastern B.C., began advertising a seven-year fixed mortgage at 2.99 per cent, well below comparable offerings from major lenders for the same mortgage term.
The credit union can afford to offer such an attractive long-term rate in part because few people actually take seven-year mortgages and the company's primary business is commercial lending to the region's natural gas industry, North Peace chief executive Mitchel Chilcott said.
But the company, whose mortgages are entirely self-funded through deposits from its 12,000 customers, also opts to earn less profit and pay out fewer dividends in order to drive rates down.
In the past, members received cheques for $1,000 roughly 14 months after the start of every fiscal year. But about five years ago the company gradually began shifting toward boosting the rates on its high-interest savings accounts and lowering them on its mortgages.
"For most homeowners, having a $90 or $100 lower mortgage payment a month was a lot more meaningful and impactful than maybe getting money back 14 months later," Mr. Chilcott said.
Other credit unions have followed a similar model, which has helped them grab more market share away from the banks. Banks lost more than 2 per cent of their share of the mortgage business last year, according to banking industry consultant David McVay, with some of that going to credit unions thanks to increased price competition.
The rate war is even more intense among mortgage brokers, many of whom are shifting away from the traditional full-service model that saw brokers spending hours working with clients to select the best mortgage and earning hefty commissions. These days, more borrowers are turning to online and "self-service" brokerages that compete on volume, offering less personalized service and sacrificing some of the commissions they earn from lenders in order to discount rates even further.
Not everyone is a fan of the model. Some are worried that with interest rates already so low, brokers are having to dig deep into their commissions to offer meaningful discounts, a model that some brokers argue could threaten the industry as a whole.
"The majority of people don't like what we're doing and it's a troublesome thing for us to digest because ultimately it's the best for the consumer," said Jeff Mark, co-founder of Spin Mortgage, an 18-month-old online brokerage that is advertising a five-year fixed rate at 2.49 per cent, well below the typical bank rate, by sacrificing some of its commissions. "We make less money per deal. I don't know how that isn't a good thing for the market."
Brokers would have to give up roughly 40 per cent of their commission from a typical five-year fixed rate mortgage just to offer a discount of 10 basis points, equal to a tenth of a percentage point, off the interest rate, writes broker Mark Kerzner in Canada Mortgage Trends. That's a huge sacrifice to offer borrowers a small savings.
"It's becoming hypercompetitive and there is only so much you can discount a rate before you make nothing," said Robert McLister, founder intelliMortgageInc, a low-rate online DIY brokerage. "We're rapidly, in my opinion, approaching a point where at the very deep-discount end of the market there's not much left to give if you're a mortgage originator and you're considering giving up your commission to offer a better rate."
Even so, the industry seems to be moving toward more discounting. Rising house prices mean borrowers have become hypersensitive to low rates and the advent of online rate comparison sites has only heightened the competition. Mr. Mark said the days when brokers spend hours in meetings with clients and then steer them toward mortgages that offer the most lucrative commission are rapidly becoming a thing of the past.
"The competition is so fierce, people are so savvy and there's so much information online," he said. "I couldn't imagine telling a client today that their variable rate is 2.3 per cent and seeing the signed paperwork back the next day. That would blow my mind. I would feel like I was pulling the wool over their eyes."