Toronto, Nov. 28, 2007
Feeling the pain -
why banks haven't dropped their rates.
Toronto, Nov. 22, 2007
Globe and Mail
ROB CARRICK
Historically speaking, we should be paying somewhere around 5 per cent for a discounted five-year mortgage right now.
The fact that we're paying close to 6 per cent shows how tough it is to be a borrower of any type in a financial world turned squirrelly by the troubles in the U.S. sub-prime real estate market. It's costing banks more to borrow the money they in turn lend out as mortgages and, naturally, this extra cost is being passed along to borrowers.
A good measuring stick for the cost of a five-year closed mortgage is the yield on five-year Government of Canada bonds. Data provided by Bob Dugan, chief economist at Canada Mortgage and Housing Corp., shows that posted five-year rates at major lenders have on average been priced at 2.44 percentage points above five-year Canada bonds for the past 7½ years. In other words, a five-year bond yield of 5 per cent would suggest posted mortgage rates of 7.44 per cent on average.
In September, the spread between posted five-year mortgages and the five-year Canada bonds was 2.9 percentage points, Mr. Dugan's numbers show. In October, it rose to 3.21 percentage points and this week it reached 3.61 percentage points.
People in the banking sector link the rising spreads to the increased rates the banks must now pay on the investments they sell in order to generate the funds lent out as mortgages. Whether the banks are selling guaranteed investment certificates or pooling their mortgage loans and selling pieces to institutional investors, they have to offer higher rates today than they did before the implosion of the U.S. sub-prime mortgage market this past summer.
Canadian banks don't have much exposure to the U.S. sub-prime mortgage sector, where there's been a surge of defaults by people who were bad credit risks to begin with. And yet, our banks are affected by the unraveling of this market because of the way it has made big investors leery of buying pretty much anything that isn't guaranteed by a government. That's why there's a growing differential between the federal government's bonds yield and what banks must offer to get people to buy their paper.
"The way the market sorts itself out in terms of risk factors, it affects every type of borrower, whether it's consumer, business or financial institutions," said Aron Gampel, deputy chief economist at Bank of Nova Scotia. "This is the changing nature of financial markets in this post-August financial crisis era."
The high cost of mortgages is even more apparent when you look at discounted mortgage rates as opposed to the posted rates at big banks. Toronto mortgage broker John Panagakos says the norm in the past has been a spread of one to 1.1 percentage points between the discounted five-year rate and the five-year Canada bond yield, which is around 3.73 per cent. These days, the spread is roughly double that. "People are paying 5.99 per cent for a five-year mortgage today," he said. They should be paying the low fives."
Variable-rate mortgages have been affected as well, Mr. Panagakos said. Whereas a break of 0.85 to 0.9 of a percentage point below the prime rate used to be the norm, now the discount has shrunk to 0.5 to 0.75.
Don't expect a return to more normal mortgage pricing any time in the immediate future. For one thing, the demand for mortgages from home buyers suggests people haven't noticed or don't care about the current rate situation.
"Mortgage demand is extraordinarily good in all the sectors - first-time buyers, resale’s, builders, refinancings," said David Fallon, associate vice-president of real estate secured lending at Toronto-Dominion Bank's TD Canada Trust division. "Each of those segments continues to defy gravity."
Home sales have been notably strong in Toronto, where buyers are trying to find homes and close their deals before the city introduces a new land transfer tax early next year. (Note: Bank of Montreal has a promotion where its daily banking customers who arrange a mortgage of five years or more by Feb. 29 will have the tax paid up to a cap of 1.5 per cent of their loan principal.) A quick end to the sub-prime paranoia in financial markets could help bring mortgage rates down, but there doesn't seem much chance of this happening. That leaves a slowdown in economic growth here in Canada as the best chance of getting mortgage rates lower.
Economists have recently forecast that the Bank of Canada will cut rates as early as next month or in early 2008, but Scotiabank's Mr. Gampel said it may take a little longer than that for mortgages to fall meaningfully. "If we are going to see rate relief on the mortgage side, it will come later rather than sooner, and that means probably some time in the late winter or early spring of 2008 at the earliest."
Kuljit Singh, Accredited Mortgage Professional
Mortgage Alliance AKAL Mortgages Inc. at 905-290-2525 x221 or
email at info@akalmortgages.com.