Mortgage Rates & Mortgage Broker News in Canada

Appraisals: Machine vs Human

An automated valuation system (AVS) is a quick way to value a property without doing a full human appraisal. 

AVSs (a.k.a. AVMs, GVMs, or GVSs) are basically massive computer databases of public records. They use comparable sale data to value billions of dollars of real estate every year, and they do it in seconds or less.

Given their efficiency, AVSs have been catching on with more lenders. While they’re not perfect (some question their accuracy and their occasional fraud allowance), AVSs have two compelling advantages: speed and cost.

Lenders and mortgage professionals love pushing out fast approvals without appraisal conditions. If you’ve got a tight closing, or you are a broker keen on prompt service, then choosing an AVS lender is a definite stress reliever. There’s no waiting for appraisal appointments to be booked, waiting for the appraiser to view the property, waiting for the appraisal report, waiting for the underwriter to review the appraisal report, yada yada...

On the cost side of things, AVSs are also a clear winner. If they’re not free altogether, they’re as cheap as $50-$75. That compares to upwards of $250 or more for a human appraisal.

For most clients, free is pretty appealing. That’s especially true on a refinance. Sometimes applicants pay $250+ for an appraisal only to find out their house isn’t worth enough to support their desired loan amount.

Speaking of cost, some lenders out there charge for AVS appraisals. Others don’t.  Other things near-equal, most mortgage professionals clearly prefer lenders with free AVSs. For some reason though, lenders who charge for AVSs seemingly don’t realize that.

Mortgage-Freedom Is Key For Retirees

75% of households own a home by retirement, and almost 3/4 of those don’t have a mortgage. That’s according to a Statistics Canada study issued on Monday.

StatCan says, “The economic benefit of owning a home is equivalent to the rent that does not have to be paid.”  And that benefit is significant because, as StatCan notes, net incomes decline by about 45% between a household’s peak earning years and the 70-plus retirement-age class.

Not surprisingly, that makes mortgage-free home ownership a vital contributor to most senior citizens’ effective household incomes.

Marketing Low Rates

Canadian Mortgage Professional (CMP) ran a story last week that caused quite a stir.

The article was about a new low-rate promotion from CanEquity. Brokers commenting on the story criticized CanEquity for claiming to have the “Lowest Mortgage Rate in Canada,” not advertising the actual rate, and not fully explaining the fees that applied to the offer.

CMP was also taken to task for running the story, which some commenters felt was inappropriate due to the nature of CanEquity’s promotion. (Here’s CMP’s response.)

All this hubbub ended up raising a number of points. Among them:

1. Advertising the “lowest rate in Canada” isn’t the world’s best idea. In particular, it can put you on the wrong side of regulators (and the industry)—unless you can actually prove there are no lower rates in the entire country.
2. If you’re going to charge an administration fee, it’s a good idea to explicitly describe how it’s calculated (Following CMP’s story, CanEquity withdrew the admin fee that applied to its rate promotion)
3. There’s a contingent of brokers who decry competitors that center their marketing around rock-bottom rates. They feel it cheapens the mortgage planning profession.
4. Many brokers are critical of lenders for offering ultra-low rates and cutting broker commissions in the process.

Points 1 and 2 are self-explanatory. Points 3 and 4 are where the debate heats up, presenting us with two central questions: is there anything wrong with advertising ultra-low rates, and what should we make of lenders who pay brokers less in return for lower rates?

Is there anything wrong with advertising ultra-low rates?

Most would say no, as long as it’s done honestly.

The downside is that the value of a mortgage planner (his or her advice and service) is often obscured in our quest for the lowest rate. Instead of choosing the most skilled advisor, consumers are being conditioned by the Internet to first call the broker with the lowest advertised rates.

As a result, it’s easy to see why Internet brokers are so eager to compete on rates.  Rate comparison sites are putting a lot of pressure on brokers nowadays. Anthony Almeida, CEO of CanEquity (one of the biggest Internet mortgage brokers in the country) says, “We're an online business and you can draw a parallel to other competitive businesses online. Our job is to always try to evolve…Five years ago, it might have been advice that people sought when visiting our website. Today, it's a more rate-sensitive business and we need to stay ahead of the curve."

The side effect, as time goes on, is that most brokers will find it harder to compete unless they are web-savvy and aggressive on rates.

Note the word “most” in that last sentence. Some of the most successful brokers in the country never advertise rates. These brokers will continue to thrive because of their service, skill, and referral networks. But even the truest professionals will lose some business at the margin as the next generation gravitates to low-rate providers.

What should we make of lenders who pay brokers less in return for lower rates?

If you’re a homeowner, you’re probably saying, “Who cares. Give me the lowest rate!” If you’re a mortgage planner, you’re a bit worried right now, even if you’d rather not admit it.

In our view, we’re at a major turning point in the industry.  Over the next few years some brokers could take a 25-45% pay cut because of the legion of brokers willing to give up 1/2 their commission to advertise lower rates. Are deep discount lenders propagating this trend? Absolutely, but free-market pricing can’t be restrained.

Consumers may indeed get the lower rates they crave in the end, but it won’t be without a cost. The quality of advice and personal service could deteriorate over time as brokers’ reward for devoting time to a deal and honing their craft may no longer be as enticing.

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Sidebar:  A good mortgage planner adds value beyond the interest rate by:

• Helping identify the lowest-cost term (which can impact total interest cost far more than a 10-20 bps rate discount)
• Comparing numerous lenders to find the best combination of features and rate
• Properly structuring difficult applications for the greatest chance of approval
• Structuring debt to help homeowners accumulate assets.

Good advice always comes at a price. The exception is when technology advancements deliver that advice more efficiently. That hasn’t fully happened yet in the mortgage planning business, but the future may bring what we haven’t yet envisioned.

Pre-Paying a Mortgage Before Discharge

Homeowners who break a closed mortgage before maturity will often make a pre-payment before the mortgage is discharged. 

The idea is to reduce the mortgage balance and thereby pay less of a pre-payment penalty.

It’s a great idea if you have the funds to do it. Remember, however, that lenders have different policies on how close to the payout date you can make a pre-payment.

Some lenders, for example, won’t allow pre-payments to be made within 30 days of the date of discharge (the date you pay off your mortgage in full).

Therefore, if you plan to pre-pay a portion of your mortgage to reduce your penalty, remember to do two things:

1. Ask your lender how close to your payout date you can make a pre-payment and still have that payment count towards reducing your penalty. (Allow several days regardless. You don’t want to cut it too close.)
2. Make the pre-payment and then confirm that your lender has applied it to your account before your lawyer requests the payout statement.  Otherwise, your pre-payment might not reduce your balance for the purposes of penalty calculation.

Fresh Mortgage Statistics From Genworth

Genworth Financial Canada released a new mortgage-related survey on Tuesday.

Among other things, the study found that:

• 23% of mortgage holders have made a lump-sum pre-payment or accelerated their mortgage payments in the last 12 months. 
  
  The first thing we thought of when reading this was that it’s a wonder more people don’t take low-frills mortgages (those with 5-10% annual pre-payment privileges). Most people have the best intentions of making pre-payments, but relatively few actually do. As a result, many needlessly overpay for large pre-payment privileges in the form of higher mortgage rates.
   
• 22% of recent and intended home buyers say they got pre-approved in the last year.
  
  This figure seems ultra low. Pre-approvals/Rate Holds are a no-risk option. They protect people against rising rates and, in some cases, establish qualification in advance of a home purchase. Interestingly, there have been other studies showing as many as 91% of first-time home buyers get pre-approved (See: More Buyers Get Pre-Approved).
   
• 49% of homeowners made down payments of 20% or more on their most recent home purchase.
  
  This seems about right. Earlier this year, CMHC found that 42% of prospective home buyers planned for at least a 20% down payment. (See: New Facts On Home Buyers)
   
• 59% of Canadians claim to pay their credit cards in full each month.

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This data was collected between March 4-10, 2010 from 2,001 respondents by Environics Research Group on behalf of Genworth Financial Canada. CMT comments in italics. Here’s more…

TD Raises Prime Rate To 2.75%

TD is the first big bank out of the gate. It just raised its prime lending rate by 1/4 point to 2.75%.

The change takes effect tomorrow.

TD was the first of the Big 5 to raise prime after the June 1 BoC meeting as well.

Other banks will likely follow later today or tomorrow.

Canada’s Key Lending Rate Headed Higher

The Bank of Canada has lifted its key lending rate by 1/4 percentage point, to 0.75%.

The Bank had this to say in its written statement:

• “The global economic recovery is proceeding but is not yet self-sustaining.”
• “Housing activity is declining markedly from high levels, consistent with the Bank’s view…”
• “The Bank now expects the economy to return to full capacity at the end of 2011, two quarters later than had been anticipated in April.”
• “Both total CPI and core inflation are expected to remain near 2 per cent throughout [2011].”

The above chart (Click to enlarge) shows just how low Canada’s overnight rate is when compared to the last 10 years. Accordingly, the BoC says today’s new 0.75% rate “leaves considerable monetary stimulus in place.”

The mortgage industry now awaits confirmation from the Big 5 banks that prime rate will follow 25 basis points higher. The banks typically announce prime rate increases the same day as BoC rate hikes. The last time around (on June 1), TD Bank was the first to act, raising its prime rate at 1:32pm ET.

Bond yields, which affect fixed mortgage rates, were down across the curve following today’s BoC statement.

As of this writing, the 5-year yield has sunk to 2.31%, just a few basis points above its one-year low of 2.29%. Given that many were awaiting today’s announcement for an indicator of rate direction, we may now see 5-year fixed rates drift slightly lower in the near term.

The next Bank of Canada interest rate meeting is September 8.

On The Eve Of The BoC Meeting…

Every major economist in the country expects the Bank of Canada to hike its key lending rate by 1/4% tomorrow (19 out of 19 economists to be exact, according to a Bloomberg survey).

What economists are most interested in, however, is how the BoC’s statement will read.  If it’s overly cautious we might see a drop in yields (which is good for mortgage rates).  If the statement has a more positive economic tone, then yields could rise. Here’s more on that from:

• The National Post: What to expect from Bank of Canada
• The Star:  Carney’s Balancing Act

The BoC has four rate decisions left this year, including tomorrow’s.  We’ll report on the Bank’s announcement just after 9:00am ET.

2010’s First Dip In Home Prices

The average Canadian home value fell 1.2% in June. It was the first drop of 2010.

There’s one thing about price declines:  They’re good at making people ask: “Now what?” 

The answer is pure speculation, as usual, because housing—like the economy, interest rates, and the weather—can’t be predicted long term.

Nonetheless, while one month does not a trend make, there is a somewhat bearish tone in real estate these days.  Below are the latest assessments from some well-known observers...

• “With interest rates on the rise, housing affordability and home sales activity are expected to continue to erode over the second half of 2010.” – Gregory Klump, chief economist, Canadian Real Estate Association
• "An expected increase in the supply of homes on the market will now bring stabilization in prices, and in some cities we will see both prices and unit sales decline towards the end of the year.” -- Phil Soper, president and chief executive, Royal LePage Real Estate Services
• “As we cross into the second half of the year, we expect to see a continued easing in activity.” – TD senior economist, Pascal Gauthier
• “…excesses in one direction are generally followed by excesses in the other direction…In a nutshell, there's more air to come out of this Canadian housing balloon.” -- Gluskin Sheff + Associates Inc., economist, David Rosenberg

Few analysts predict an outright crash, though. Most are calling on a strengthening economy and employment to pad the fall. But again, it’s all speculation based on future uncertainty.

That uncertainty is prompting some first-time homebuyers to think extra long about their buying decision. In the last few months, we’ve come across a fair number of home buyers who are hesitant to buy because they expect prices to fall.

CIBC, for example, expects a 5-10% drop by summer 2011. Suppose, for illustrative purposes, we averaged that to a drop of 7.5%.  If the economy continues its recovery and fixed rates rise 1%, the mortgage picture could pan out something like this (these aren’t predictions, just a hypothetical):

TODAY

• Average Canadian home price: $342,662
• Typical 5-year fixed rate:  4.09%
• Payment w/ 35-yr amz & 5% down:  $1452

JULY 2011 (HYPOTHETICAL)

• Average Canadian home price: $316,962
• Typical 5-year fixed rate:  5.09%
• Payment w/ 35-yr amz & 5% down:  $1526

Thus, a person looking to buy an average house in this scenario pays $74 more a month by waiting a year to buy, but saves $25,700 on the price.

Mind you, you have to adjust for rent expense (people need to live somewhere while they’re waiting to buy), property taxes, etc. But still, someone could easily make an argument that waiting to buy is the most economical decision in certain real estate markets—even if rates go up.

This isn’t meant to scare people from buying homes. But if you’re looking to buy with only 5% down, it should make you think a bit. People with little equity need to have a long-term time horizon and solid employment prospects, because real estate risk has undeniably increased.

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Sidebar Question: What’s the probability of home prices dropping the month after the first decline in six months?

Answer:  45% (based on 55 occurrences since 1980)

Dominion Lending Signs Don Cherry

Dominion Lending Centers has inked Canadian hockey legend, Don Cherry, to a 2-year endorsement agreement.

Cherry will appear in a $2 million ad campaign starting the third week of September.

Don Cherry is best known for being the ‘flamboyant yin’ to Ron MacLean’s ‘yang’ on the popular Coach’s Corner segment on Hockey Night in Canada, which is the most watched sports telecast in the country.

DLC President, Gary Mauris, said “Don Cherry was a great fit for Dominion Lending Centres as the core demographic that he has most influence over is young families. Don was recently recognized as the 23rd most trusted Canadian by Readers Digest and was named one of Canada's Top Ten Greatest Canadians.”

“Scotiabank and Tim Horton's both have heavily invested in Hockey-related marketing due to the family demographic,” says Mauris. “I believe this will be a Pioneering move in the mortgage industry in Canada. We are moving to all 30 second commercials so that we can begin telling the public the story of what Mortgage Professionals do and the value we have to the consumer. The entire mortgage industry including our competitors, our lenders, insurers and associations are going to benefit from this game-changing initiative.”

It is certainly one of the biggest promotional campaigns we’ve heard to date in the brokerage industry.