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It may be time for homebuyers to batten down the hatches. The first shots have been fired in the mortgage price war of 2015.
Three of Canada’s major banks have launched an opening salvo following the Bank of Canada’s surprise decision to cut its overnight lending rate last week by 25 basis points to 0.75 percent. Royal Bank of Canada (RY.TO), TD Bank (TD.TO), and BMO Bank of Montreal (BMO.TO) have all decreased their prime lending rates by 15 basis points to 2.85 percent from 3 percent. And there could be more where that came from.
“It’s not out of the realm of possibility that we will see a bank roll out a 2.5 percent five-year fixed offer, probably as early as March heading into the spring season,” said Ben Rabidoux, the president of North Cove Advisors.
He says it may look like the big banks are out to pad their net interest rate margins, but in reality they’re trying to hold onto the status quo as growth in mortgage credit slows to the lowest rate in 20 years at chartered banks, and non-traditional players gain popularity.
“Looking at growth in residential mortgage credit in Canada by the chartered banks, it’s only 4 percent year-over-year. When you talk about a dwindling flow of mortgage credit up for grabs, then it’s not uncommon to see competitors start to undercut and get very aggressive on the pricing. I suspect that’s where we are heading with the big banks,” said Rabidoux.
BIG BANKS LOSING MORTGAGES TO UNREGULATED LENDERS
Federally regulated lenders still account for the lion’s share of the home loans in Canada. A 2013 Bank of Canada report pegged unregulated lenders at just five percent, but industry insiders say that number is considerably higher as the little guys take advantage of stricter lending rules introduced at big banks since 2008.
“The big banks have slowed quite dramatically. Where it has expanded equally dramatically is in your non-traditional lenders. So your subprime lenders, your Home Capital (HCG.TO) and Equitable, but then also much more in the private lending space, which is actually much more of a concern because of the structure of mortgage credit there. It’s extremely hot money. It’s actually something that I think regulators will increasingly tune into,” said Rabidoux.
SOME MARKETS WIN, SOME MARKETS LOSE
While Rabidoux says rate cuts are “unambiguously positive” for Toronto and Vancouver, he’s less optimistic about the benefits in the middle of the country.
“I don’t think it’s going to do much to help the Calgary’s, and the Edmonton’s, and the Saskatoon’s where we are seeing sales fall dramatically year-over-year and we are seeing new listing growth that is really quite dramatic at this point,” he said.