November 4, 2016

Why Some Banks Have Lower Mortgage Rates, Despite New Rules

As you may have read, TD Bank recently raised their prime lending rate to 2.85% – 15 basis points higher than the 2.70% advertised by the other banks. It’s a change that impacts those with a variable-rate mortgage; your monthly payment will remain the same, but the payment distribution to your principal debt will lesson and your interest portion of the payment will increase by 15 bps starting on November 1, 2016.

TD has since stated that they raised their rate to offset anticipated higher funding costs as a result of recent mortgage rule changes. So why, then, have smaller lenders since slashed their mortgage rates – and what does it mean for mortgage shoppers?

Why are non-bank lenders reducing rates?

If you go to ratehub.ca, you will see a recent decrease in mortgage rates, especially over the past few days. The difference between the smaller lenders and TD, though, is that they’re doing their best to capitalize on locking up new business before the November 30^th deadline set by the Office of the Superintendent of Financial Institutions (OSFI). That’s great news for the marketplace and for customers who are looking to take advantage of these great rates on fully featured mortgage products.

What changes on November 30^th?

On November 30^th, the Department of Finance is mandating the Big Banks to hold back more money for the fear of future foreclosures on Canadian homes. Canadians have been warned for years now that these rate increases were coming, so it shouldn’t be a huge shock – but people still chose to accumulate unsustainable debt loads. TD’s move is a smart business move to take advantage of some early mortgage interest rate profits before the mandated reforms.

I have a fixed-rate mortgage or line of credit. Should I care about TD’s prime rate increase?

Quite simply, yes. While your rate is locked in for the remainder of your term and isn’t impacted by the prime rate, these changes will filter down to your cost of borrowing eventually.

We keep hearing that the Canadian housing market is over inflated, and housing is less affordable for many. OSFI has mandated changes to the Big Banks as a way to help soften these increasing home prices. These are in addition to the changes introduced on October 17^th, which require those purchasing a home with less than a 20% down payment must qualify at the Bank of Canada’s 4.64% qualifying rate, regardless of which term you choose.

The new rule is impacting affordability: if you have a 5% down payment of $25,000 then you should be able to purchase a home for $500,000 based off of the 4.64% qualifying rate. Your monthly principal & interest payment should be around $2,762. With a decent credit score and little to no debt, you’d need at least a $90,000 household income to qualify.

Prior to October 17, you could have been able to afford 25% more of a home purchase price – with that much more affordability, you potentially could have moved to a different neighbourhood or even city to afford your preferred home.

I’m renewing or refinancing my mortgage. Will I be affected by the stress test?

Those who are renewing their mortgages won’t be subjected to the stress test, and those who are refinancing will likely avoid it, as they typically have more than 20% of their home’s value invested in equity. But these homeowners will still potentially be affected; all mortgages will be subject to possible rate increases or additional fees for refinancing your mortgage term, amortizing for more than 25 years, as well as houses valued over $1million. Many lenders have already begun to increase rates on these products.