The Banks have been Stealing!

Let’s clear the air on the so called rate wars!

There is a lot of hype right now with all the press being given to the recent rate drops. It started with BMO announcing a 5 year fixed rate mortgage at 2.99% and then TD followed with a 4 year at the same rate. What BMO failed to mention is all the restrictions with this mortgage offer but we’ll get to that.

What you need to understand first is that these recent drops are not a big shock. The banks have been stealing spread (profit) on their mortgages for some time now. Fixed mortgage rates are set off the Gov’t of Canada bond yields and historically the banks have priced their lowest rates at about 1.5% – 1.8% above the bond yields to be profitable on the loan. For example in May 2011 the 5 year bond yield was 2.4% and the best discounted rate at a major bank was 3.89, a spread of 1.49%.

But recently with the banks stripping discounts on VRM mortgages, they have been gobbling extra spread as the bond yields have dropped. For example before the rate drops last week, the best rate for a 5 year fixed at a major bank was 3.49% and the bond yeild was 1.26%, a spread of 2.23%.

Here’s whats happening with rates and what’s driving low bond yields. Given the global economic uncertainty, Canada is an attractive investment for international investors and so they are buying government bonds. When demand goes up, the yield or return is driven lower and that is what mortgage lenders set their rates off of. So as the Euro crisis continues and the U.S. economy struggles to get started, Canadians will enjoy low rates.

Now back to the BMO offer. What they failed to mention is it is a stripped down mortgage from their standard offer. With a reduced amortization, limited pre-payments privledges and restrictions to refinance or pay off, the old adage, “you get what you pay for” holds true. Don’t get caught up with special low rates as there is always a catch. You are better off to take a 4 year term at the same rate with all the standard bells and whistles or  a 5 year at 3.29% which only boost your payments by about $40 per month for a $250,000 mortgage.

So don’t be fooled by the bank’s veiled generosity and temporary rate drops. We are continually boggled why Canadians march back to their banks to pay higher rates and receive lower returns on their investments. The banks can’t be working in your best interest when their best interest is profitability.

We suggest working with lenders that are consistently the lowest in the market and provide our customers with fair pricing, great service and good products.

If you would like to learn more about your options to for these low rates, give us a call. We’d be pleased to help!

Douglas Dane
Mortgage Agent, Managing Partner

The Mortgage Centre