A bit of a mortgage-theme here today on TRB, but I had two topics in mind and figured I’d group these together in one post.
First, we have significant competition among the Big-5 banks as they lower variable rates to try to gain more business.
Second, we have the odd listing coming out on MLS advertising vendor take-back mortgages.
This should give the market bears something to rest their hats on…
Who doesn’t love a good rate war, am I right?
My goodness, it’s been so long!
I went through my blog history just now, looking for a specific reference to rate war that I recall from the past, and I was surprised to see that it was actually over four years ago!
Here’s the blog: “Ready, Set, Rate War!”
That was back in March, 2014, when the 5-year, fixed-rate fell below 3.00%.
And within that post, I referenced a Globe & Mail article that couldn’t have possibly been more wrong: “Why Cut-Rate Mortgages Won’t Be Here For Long”
Who knew that rates would go even lower?
Many of you have benefitted from 5-year, fixed-rates as low as, what, 2.39%?
That’s just insane.
And both market bears, and/or the ‘older’ folk, will regale us with stories from yesteryear, when rates were sky-high.
Just to put the interest rate environment into context, let’s take a look at the Prime Rate history from 1960 to today:
Yes, we’ve been in a low interest rate environment for quite some time now. I don’t think that’s in dispute.
And the question that many of you are asking is – how high would rates have to go to really have an effect on the market?
Those 2.29% 5-year rates are long gone!
Rates were up over 3.5% last time I checked. But alas, it seems the banks have other plans!
Cue the 2018 rate war:
From Tuesday’s Financial Post:
TORONTO — TD Bank is joining a rival bank in offering a highly discounted variable mortgage rate as competition among Canada’s biggest lenders heats up.
The Toronto-based bank said Tuesday it’s lowering its five-year variable closed rate to 2.45 per cent, or 1.15 per cent lower than its TD Mortgage Prime rate, until May 31.
TD’s special rate follows last week’s move by the Bank of Montreal, which discounted its variable mortgage rate to 2.45 per cent until the end of May.
Canada’s lenders often offer special spring mortgage rates as home buying activity picks up, but Robert McLister — founder of rate comparison website RateSpy.com — said last week that BMO’s special discounted variable rate was the biggest widely advertised discount ever by a Big Six Canadian bank.
TD’s discounted rate on Tuesday brings its variable mortgage rate offer in line with BMO’s.
1.15% lower than the Prime rate.
Until May 31st, yes. But what if this promotion “works?”
Real estate sales are down across the country, and the GTA is no different, where we’re off 30-something percent so far this year. Banks are in the business of making loans, and suffice it to say, if they can’t make loans, they can’t make money.
Some will argue that sales are down because rates are up.
Others will argue that sales are down because prices are up.
Then, others will suggest that it’s more to do with new mortgage rules, and affordability.
Any which way, the banks need to make more loans, and thus lowering their rates and providing promotions is one way to do that.
This promotion runs until May 31st, but if the banks see their loan numbers increase, this could become a permanent promotion.
It’s not unlike car dealerships, who advertise a different promotion every month, which is essentially the same offering, just packaged under the “New Year” tag one month, the “Valentine’s Day” tag the next month, followed by the “Spring into Spring,” the following month, and so on.
Of course it’s no surprise that once one bank started offering the discount, the others followed.
Who doesn’t love an oligopoly, right?
Now ironically, as this “rate war” is happening with the 5-year closed variable, rates on the 5-year, fixed are increasing!
I’m thinking Robert Frost here…
“Two roads diverged in a narrow wood,” and so on.
From last Wednesday’s National Post:
TORONTO — Canada’s Big Six banks have all increased their benchmark fixed-rate mortgage rate, a move analysts say could trigger a rise in the Bank of Canada’s qualifying mortgage rate as early as Wednesday, making it more difficult for some to take on home loans.
The Bank of Nova Scotia on Tuesday became the last of Canada’s biggest lenders to raise its posted rate for a five-year fixed-rate mortgage — from 5.14 per cent to 5.34 per cent. They also increased the posted rates for other fixed-rate term lengths.
Such rates are different from the actual mortgage rates offered by banks to borrowers, which are not seeing the same increases. But the Bank of Canada uses the posted five-year fixed mortgage rates at Canada’s biggest banks to calculate the rate used in stress tests to determine whether borrowers can qualify for both uninsured and insured mortgages.
And with a rate announcement coming from the Bank of Canada on May 30th, your guess is as good as mine as to where the lending sphere ends up.
Some rates are being slashed, others are being increased.
And all the while, I hear from mortgage brokers that the banks are dying to loan money! They hate the new mortgage rules, they don’t like the restrictions, and that more “promotions” like the 5-year variable closed could be on the horizon.
It would be nice if the Bank of Canada and the Big Five banks worked in tandem, but as we know, they have different agendas.
Now switching gears, when was the last time you heard of a seller offering, or a buyer asking for, a vendor take-back mortgage?
It’s certainly been a while.
As many of the wiser folks know, these used to be common place! Think back to the 80’s – transactions hinged upon what terms the seller was offering!
Here’s a sample listing I dug up from the MLS archives:
That’s from a listing in 1989, where the vendor was offering a $300,000 mortgage at 11.5%, for 1-year, when banks were looking for 13.5%.
It sure made sense if you were a seller.
That property was listed at $739,000.
Let’s say the buyer took the seller up on that $300,000 VTB at 11.5%.
$300,000 at 11.5% is a $4,377.10 per month mortgage payment.
$300,000 at 13.5% is a $4,995.96 per month mortgage payment.
Are the margins for the buyers that thin?
Does that $618.86 per month make or break the transaction for the buyer?
If it does, then the seller is smart to offer this vendor take-back mortgage. The vendor’s opportunity cost is 2% of $300,000, or $6,000. But what if this helps the vendor sell the $739,000 house, versus not sell it at all? Perhaps the vendor can obtain $735,000 for the house, from this buyer, but only $700,000 from a buyer using cash, or bank financing?
Fun times, for those of you who lived through this market.
I’ve never worked in that environment, but I was very interested when I saw this listing the other day:
A nice way of saying “Free Vendor Take-Back Mortgage!”
Keep in mind, this is the first time I have seen this offered this year, or ever, really. At least in recent memory.
So what are the implications here? Both short-term, and medium-term for those of you who want to draw inferences?
I suppose an optimist would just say, “The seller is offering a discounted rate on part of the financing – which is undetermined, as an incentive, much like throwing in the flat-screen TV in the offer.”
A pessimist would say, “The builder can’t offload the house! The market is weak! He’s offering to finance the house for FREE to get out from under it!”
Given this is the first I’ve seen of this, I would probably lean toward the former.
At the very least, it falls a little bit left of centre.
Plus, as I said, we don’t know anything about the terms and conditions.
How much is the seller offering?
How long is the term?
What qualifications are needed?
Let’s say this is a $3,000,000 house, and the seller is willing to offer a $500,000, 1-year loan at 0%. How much of an incentive is this really?
With variable rates around 2.45%, we’re talking a paltry $12,250 in savings! On a $3 Million house!
But what if it’s a 3-year, fixed rate loan for the balance? What if the buyer could provide the minimum down (20% of the first $1M, and 50% of the balance, for a $1,200,000 down payment), and the seller would finance the rest?
A $1,800,000 loan at 0%, for 3-years.
Say we’re looking at a 3.2% comparable 3-year rate, that’s a $172,800 savings, or more if we’re compounding semi-annually.
All of a sudden, we’re talking meaningful numbers here. $180,000 is nothing to sneeze at, even in the context of a $3M house.
More to the point, what if the buyer wasn’t able to secure bank financing for the balance of $1,800,000, with the $1.2 Million down?
Now not only is the buyer getting a sweet deal in the form of a $180,000 interest savings, but he also gets to buy the house in the first place!
Some of you might be thinking, “Oh great, here we go. A guy who can’t get a bank loan is getting an interest-free loan from the seller, to buy a house he would otherwise not be able to afford? What could go wrong here?”
But if the buyer and seller want to make a deal, what’s stopping them?
And to be completely honest, I have a hard time believing a buyer with $1.2M down can’t secure financing for a $3M house. Unless that $1.2M is a gift from Mom & Dad, or a drug dealer’s money in cash, these people are probably gainfully employed at salaries that represent their down payments.
Until I see this sort of “promotion” offered in an active MLS listing again, I’m going to consider it a one-off.
But if any of you out there see something to this effect advertised, please email me!
For now, let me open the floodgates to the inevitable interest rate, debt, and risk conversation…