The Battle for Borrowers: The Value of Mortgage Brokers in a Volatile Market
A full-blown rate war has erupted among Canadian lenders in a development with mortgage experts buzzing. This fierce competition has driven mortgage rates to historic lows, with discounted 5-year fixed-insured mortgages now available at an astonishing 3.99%. The primary catalyst behind this rate war is the recent decline in bond yields, which have fallen by more than 1.18 percentage points since their peak in April. As bond yields decrease, lenders have more room to maneuver and offer lower rates to attract borrowers.
Canada 5 Years Bond – Yield Range
The yield changed +0.5 bp last week, -21.5 bp last month, and -152.3 bp last year. The current Yield is close to 1-year minimum value
| Period | Change | Min | Max |
| 1 Week | +0.5 bp | 2.70% | 2.75% |
| 1 Month | -21.5 bp | 2.70% | 3.06% |
| 6 Months | -80.1 bp | 2.70% | 3.94% |
| 1 Year | -152.3 bp | 2.70% | 4.47% |
| Current Yield | 2.74% | ||
Competition has become particularly intense among the Big 5 banks (RBC, TD, Scotiabank, BMO, and CIBC), traditionally known to adjust their rates slower than smaller lenders. In recent weeks, these major players have slashed rates by up to 0.25 percentage points in a bid to capture market share.
The Strategies Behind the Rate War
According to industry insiders like Ron Butler of Butler Mortgage, this aggressive rate-cutting is motivated by two key factors:
- Offsetting Slowing Mortgage Originations: As the housing market cools down and mortgage originations decrease, lenders are looking to boost their business by offering attractive rates.
- Competing for Market Share: In a highly competitive market, lenders are vying for a larger slice of the pie by offering the lowest rates possible.
This strategy is particularly evident in the insured mortgage segment, where rates are currently 20 to 40 basis points lower than uninsured mortgages. Insured mortgages, typically requiring a down payment of less than 20%, are seen as less risky for lenders, allowing them to offer more competitive rates.
The big banks are also leveraging discretionary rates, offering even lower rates to select borrowers based on their financial profiles. CIBC was the first to break the 4% barrier with a 3.99% insured rate, and most other major banks have now followed suit.
The Mortgage as a Loss Leader: A Strategy for Long-Term Profitability
While the current rate war may seem like a race to the bottom, lenders have a long-term strategy. They aim to attract new customers by offering attractive mortgage rates and cross-selling other financial products, such as credit cards, insurance, and investment accounts.
Scotiabank, for instance, has successfully implemented this strategy, with nearly 85% of its mortgage clients also holding other financial products. This allows the bank to maintain profitability even with razor-thin mortgage margins.
Other big banks are likely to adopt similar tactics as the rate war intensifies. Using the mortgage as a gateway to deeper financial relationships, they hope to foster customer loyalty and drive long-term profitability.
Shifting Borrower Preferences: Fixed vs. Variable Rates
While the allure of historically low rates is undeniable, the current rate war is also influencing borrower preferences when it comes to choosing between fixed and variable-rate mortgages.
Traditionally, variable rates have been popular in Canada due to their potential for lower interest costs over the long term. However, with fixed rates now reaching unprecedented lows, many borrowers are opting for the stability and predictability they offer.
The current market volatility and uncertainty surrounding future interest rate hikes have further contributed to this shift towards fixed-rate mortgages. Borrowers are seeking peace of mind, knowing that their mortgage payments will remain constant even if interest rates rise in the future.
The Broader Economic Context: Bank of Canada and Inflation
While the rate war among lenders is a significant factor driving the current mortgage market, it’s crucial to consider the broader economic context. The Bank of Canada’s monetary policy and the inflation outlook play a pivotal role in shaping interest rates.
The Bank of Canada has been gradually raising its policy rate to combat rising inflation. However, recent economic data suggests that inflation may be easing, potentially prompting the central bank to pause its rate hikes or even consider lowering rates in the future.
These developments have a direct impact on bond yields, which in turn influence mortgage rates. If the Bank of Canada signals a more dovish stance on interest rates, bond yields could fall further, leading to even lower mortgage rates.
What Does This Mean for You?
- Lower Mortgage Payments: The most immediate and tangible benefit of the mortgage rate war is the potential for significantly lower monthly payments. For example, on a $500,000 mortgage, a 0.25% reduction in interest rate can translate to savings of over $60 per month. Over the life of a mortgage, these savings can add up to thousands of dollars.
- Increased Affordability: Lower rates can make homeownership more accessible for first-time buyers and those looking to upgrade their homes. With reduced interest costs, borrowers can qualify for larger mortgages or comfortably afford their current payments.
- Opportunity to Refinance: Existing homeowners with higher mortgage rates can take advantage of the current environment to refinance their mortgages and potentially save a substantial amount of money.
- More Negotiating Power: The increased competition among lenders gives borrowers more negotiating power. Don’t be afraid to shop around and compare offers from different lenders to secure the best possible rate and terms.
- Expert Guidance is Key: While the current market presents attractive opportunities, it’s also more complex than ever. A knowledgeable mortgage broker can help you navigate the various options, compare offers, and find the mortgage that best suits your financial goals and risk tolerance.
Beyond the Lowest Rate: The Value of Mortgage Brokers
While finding the lowest possible rate is undoubtedly a priority for many borrowers, it’s important to remember that there’s more to a mortgage than just the interest rate. Mortgage brokers play a crucial role in helping borrowers navigate the complex mortgage landscape, offering personalized advice, competitive rates, and ongoing support.
As more borrowers opt for variable-rate mortgages in the current market, the value of mortgage brokers becomes even more apparent. They can help clients understand the risks and rewards of different mortgage products, educate them about market trends, and provide guidance on managing their mortgage over the long term.
A Golden Opportunity for Borrowers
The current mortgage rate war presents a golden opportunity for borrowers to secure historically low rates. However, it’s important to remember that the lowest rate isn’t always the best option. Factors such as the type of mortgage, the lender’s reputation, and the terms and conditions of the mortgage should also be considered. By working with a knowledgeable mortgage broker and carefully weighing their options, borrowers can take advantage of this unprecedented competition and find the mortgage that best suits their needs and financial goals.
