Got a small mortgage balance owing? Why you'll likely get a lousy rate.
Special to The Globe and Mail -PublishedSunday, Nov. 22, 2015 5:45PM EST -Last updatedMonday, Nov. 23, 2015 8:12AM EST
Picture this: You spend 15 or 20 years slaving to pay down your mortgage. Youve built up 80 per cent equity in your home and you have just five years left until its free and clear.
After all that effort, after all that built-up equity, you deserve the lowest mortgage rate around, right?
Perhaps, but thats not how it works in our mortgage market. The people rewarded with the lowest rates are the ones with big, fat six-figure mortgages, and there are two main reasons for it. The first one wont surprise you, but the second one might.
The No. 1 reason that lenders covet monster loans is profit. If youve got a giant mortgage, banks and credit unions figure youll have more assets to invest with them, more savings to rot in their 1-per-cent savings accounts, more purchases to put on their credit cards and credit lines, more appetite for insurance and so on.
Thats why its easier to grind down a banks mortgage specialist on a $700,000 loan than one for $70,000. (One exception is when you have a small mortgage, plus a large amount of non-mortgage business with that lender, and you threaten to leave them.)
Brokers are the same way. They earn commissions just like bankers. And the bigger the mortgage, the bigger the commission.
Thats why some of the best deals on rate-comparison websites say things such as: For mortgages of $300,000 or more. Mortgage minimums are becoming more and more common.
For most brokers, one $300,000 mortgage is better than doing six for $50,000. Of course, six $50,000 clients means six potential referral sources instead of one. But it also means exerting six times the effort to close those mortgages, and time is a scarce resource for brokers.
The second reason small-time borrowers do worse in the rate department is risk. Its one of the most counterintuitive things in the mortgage industry, but someone with a puny 5-per-cent down payment often gets a better rate than someone whos been pounding down his or her mortgage for decades.
Thats crazy, you may say. Isnt my mortgage less risky if I have a huge amount of home equity?
Technically, yes. But if youre dealing with a lender who sells mortgages to investors, thats not always reality. Mortgage investors prefer the safety of insured mortgages. Those are mortgages where an insurer, backed by the Government of Canada, guarantees to pay off the balance if the borrower defaults.
Theres a cost for this insurance, and when the mortgage is less than 80 per cent of the property value, the lender must typically cough up this fee. By comparison, when the loan-to-value ratio is more than 80 per cent, it is the borrower who pays that insurance premium. For lenders who sell their mortgages to investors, avoiding the cost of insurance lets them offer slightly lower rates usually about one-tenth of a percentage point lower.
Quick tip: If youre renewing a mortgage that you paid to insure, youve built up 20 per cent equity or more and youre switching lenders, provide your insurance policy number to your new lender or broker. Keeping your default insurance in force costs you nothing and gives you a wider selection of lenders and rates when you renew the next time.
So, where can diligent borrowers go for a deal on a mini-mortgage? Most people just renew with their existing lender. Saving one-tenth of a per cent interest on a $50,000 mortgage with a five-year term and amortization is only about $130. Unless you need to refinance or add a secured line of credit, the trivial savings dont offset the hassle of reapplying elsewhere, collecting your documentation, getting your home appraised (which you must often pay for), meeting with a lawyer or closing agent, paying your lenders discharge fee and so on.
None of this should stop you from trying to better your rate. At the very least, use competitors rate quotes as a bargaining chip, either with your existing lender or with a broker who doesnt have a mortgage minimum. And if you have loads of other business with your bank or credit union, definitely use that as leverage. There are always other lenders who would welcome all of your banking business with open arms.
Forecast Update: Economies Shutting Down
Rapidly evolving developments necessitate an update to the forecasts we published just last Friday. Additional quarantine or shut-down measures have been put in place in a number of countries in the last few days. As a result, we now anticipate global GDP growth to be 0% in 2020, followed by a sizeable rebound in activity in 2021 given our view that economic activity will rebound quickly once the virus is no longer a serious threat to public health. At present, we believe activity will begin to return to normal in the third quarter, except in countries where containment measures were aggressively deployed in the first quarter (essentially the Asian economies), where activity resumes in the second quarter. In Canada, the closure of non-essential business in Quebec and Ontario announced earlier this week will have large economic consequences. At present, we believe Canadian economic activity will fall by 28% in Q2 as these measures are felt. If other provinces follow, the fall in Q2 economic activity would be in the 35% range. We now assume that economic activity resumes by the start of the third quarter and that growth rebounds sharply at that time. However, the 20% drop in US economic activity in the second quarter will restrain the rebound in Canadian activity in the third quarter owing to the usual lags between US and Canadian economic outcomes. Under these assumptions, Canadian GDP would fall by slightly more than 4% in 2020 and rebound by 5.1% in 2021. Though we have not included any additional measures in this update beyond those already announced, we believe a substantial ramping up of fiscal support measures in Canada is forthcoming. There is a chance that aggressive virus management measures are required beyond Q2 to ensure the virus is truly well-contained. Evidence in Asia this week suggests that even in countries where aggressive management measures have been put in place, COVID-19 can come back quite quickly. If measures in Canada are not lifted by the end of Q2, growth would fall again in Q3, and GDP would fall by 6.3% in 2020 instead of the 4.1% we currently expect. A key question for forecasters is the length of the virus-related restrictions on firms and households. As noted above, a shift of one quarter in the resumption of normal operating conditions can have a large impact on growth outcomes. Since we do not have a good handle on the ultimate length of the interruptions, we consider it more informative to assign probabilities to the time at which virus containment measures end. At this time, we believe there is a 75% chance that activity resumes by Q3 and a 25% chance that activity returns to more normal levels by Q4. How officials manage virus containment internationally, as well as the evolution of the virus, will inform our assessment of probabilities going forward.
Source: Scotiabank Economics
Home resale market was gaining momentum prior to Covid-19
At the national level, resale home prices were gaining momentum in February. The 0.4% monthly gain in the Composite index was double the average of the previous ten years for a month of February. In particular, after 12 consecutive monthly declines, Vancouver HPI rose in each of the last five months, reflecting the fact that Vancouver resale market recently returned to balance. Sure, we still saw weakness in other regions, such as the Prairie Provinces (Alberta, Manitoba and Saskatchewan) where markets were still favorable to buyers. But CREA just reported a rather generalized increase in home sales in February, including for Calgary and Edmonton. Unfortunately, then came the outbreak of Covid-19 and its impact on oil prices and disruptions in the supply chain. The unprecedented sanitary measures imposed by the authorities to tackle the pandemic will severely impact business activity and jobs over the coming months. In that situation, the home resale market should be heavily curtailed for the coming months.
Source: Teranet Inc., and National Bank of Canada