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.
Bank of Canada maintains policy rate, continues forward guidance and current pace of quantitative easing
The Bank of Canada on September 8th held its target for the overnight rate at the effective lower bound of percent, with the Bank Rate at percent and the deposit rate at percent. The Bank is maintaining its extraordinary forward guidance on the path for the overnight rate. This is reinforced and supplemented by the Banks quantitative easing (QE) program, which is being maintained at a target pace of $2 billion per week.
The global economic recovery continued through the second quarter, led by strong US growth, and had solid momentum heading into the third quarter. However, supply chain disruptions are restraining activity in some sectors and rising cases of COVID-19 in many regions pose a risk to the strength of the global recovery. Financial conditions remain highly accommodative.
In Canada, GDP contracted by about 1 percent in the second quarter, weaker than anticipated in the Banks July Monetary Policy Report (MPR). This largely reflects a contraction in exports, due in part to supply chain disruptions, especially in the auto sector. Housing market activity pulled back from recent high levels, largely as expected. Consumption, business investment and government spending all contributed positively to growth, with domestic demand growing at more than 3 percent. Employment rebounded through June and July, with hard-to-distance sectors hiring as public health restrictions eased. This is reducing unevenness in the labour market, although considerable slack remains and some groups particularly low-wage workers are still disproportionately affected. The Bank continues to expect the economy to strengthen in the second half of 2021, although the fourth wave of COVID-19 infections and ongoing supply bottlenecks could weigh on the recovery.
CPI inflation remains above 3 percent as expected, boosted by base-year effects, gasoline prices, and pandemic-related supply bottlenecks. These factors pushing up inflation are expected to be transitory, but their persistence and magnitude are uncertain and will be monitored closely. Wage increases have been moderate to date, and medium-term inflation expectations remain well-anchored. Core measures of inflation have risen, but by less than the CPI.
The Governing Council judges that the Canadian economy still has considerable excess capacity, and that the recovery continues to require extraordinary monetary policy support. [The Bank of Canada] remains committed to holding the policy interest rate at the effective lower bound until economic slack is absorbed so that the 2 percent inflation target is sustainably achieved. In the Banks July projection, this happens in the second half of 2022. The Banks QE program continues to reinforce this commitment and keep interest rates low across the yield curve. Decisions regarding future adjustments to the pace of net bond purchases will be guided by Governing Councils ongoing assessment of the strength and durability of the recovery. [The Bank of Canada] will continue to provide the appropriate degree of monetary policy stimulus to support the recovery and achieve the inflation objective.
The next scheduled date for announcing the overnight rate target is October 27, 2021. The next full update of the Banks outlook for the economy and inflation, including risks to the projection, will be published in the MPR at the same time.
Source: Bank of Canada
Ontario weighs down residential permits nationally
The total value of building permits in Canada decreased 3.9% to $9.9 billion in July. All provinces except British Columbia and Newfoundland and Labrador posted lower values, with the majority of the national decline reported in Alberta (-23.4%). Building permits fell 3.1% in the residential sector and 5.6% in the non-residential sector.
On a constant dollar basis (2012=100), building permits fell 3.8% to $7.0 billion.
Seven provinces reported declines in the residential sector, led by Ontario (-10.5%).
Single-family permits fell 9.6% in July, with two provinces showing growth. Ontario (-9.1%) contributed the most to the decrease.
Construction intentions for multi-family units rose 2.7% in July. British Columbia posted an increase of 55.1%, which was driven by high-valued condo projects in the city of Surrey. In contrast, Ontario reversed strong growth in June (+67.6%) and fell 11.7% in July due to fewer high-valued condo permits reported for the census metropolitan areas (CMA) of Hamilton and Guelph.