Mortgage rates are near all-time lows but for the best deal, move to British Columbia.
The province has Canada's most expensive housing but its residents are getting rockbottom rates thanks to a ferocious battle between B.C.'s credit unions and the banks.
B.C. home prices, Vancouver in particular, have long outpaced the rest of the country. The Canadian Real Estate Association said nationally home prices were up 8.9% in March from a year ago, but take out B.C. and the percentage shrinks to 4.3%.
The credit unions are another factor behind the higher prices in the province - loans from credit unions are as low as 3.64% on a five-year fixed rate closed mortgage. Canadians in other provinces, even hard negotiators, are lucky to get 4.19% from big banks.
There are several niche products that go lower but they usually come with a catch.
"I think it's possible it could become part of the story," said Benjamin Tal, deputy chief economist with CIBC World Markets, about the cheaper money driving up prices.
Elton Ash, regional executive vice-president of Re/Max of Western Canada, said his son-in-law is thinking about paying a penalty to break his mortgage to get a lower rate.
"The cheap rates have been a factor in condo sales in Vancouver and for first-time home buyers, not as much in larger homes," Mr. Ash says.
The monthly payment on a 4.19% five-year closed $500,000 mortgage amortized over 30 years would be $2,431.65. Total interest over the mortgage period would be $99,250.85.
Lower the rate to 3.64% and see what happens. The monthly payment goes down to $2276.80 and the interest paid over the term drops to $85,956.42.
Vancouver-based mortgage broker Robert McLister said he's never seen the gap between banks and credit unions this wide. "The credit unions are flush with cash," he said, referring to money deposited during RRSP season. That cash has to be deployed.
Part of the discrepancy is due to banks raising rates over the last month to match five-year government of Canada bond increases. "If their cost of funding [mortgages] goes up, the banks raise their rates," the mortgage broker said.
But bond yields have dropped 30 basis points since April 11 and the banks have been slow to compensate for the situation, waiting to see if rates go back up. Mr. McLister says the banks raise rates more quickly than they lower them.
"We just have retail deposits and that's what we use for funding," says Norman Krannitz, vice-president of treasury of Coast Capital. "We looked at our deposits rates and they weren't going up so we decided to ride it out. We love the business we are getting."
The discounting is widespread among B.C. credit unions. Vancouver City Credit Union is offering 80 basis points off prime for a five-year variable rate product, compared to 75 basis points from the banks. It will also go as low as 3.64% on a five-year fixed rate product if you bring two additional pieces of your banking to them.
"The money business is generally a commodity business. There is generally very little difference in price," said Richard Seres, vice president of marketing with Vancity.
Before you get too jealous, there are good deals in other parts of Canada but also less willingness from consumers to stray from established banks.
"We had a succesful RRSP and we raised a lot of cash. It's such a competitive marketplace we have had to stay significantly below the banks," said Jack Vanderkooy, chief executive of Toronto-based DUCA Financial Services Credit Union Ltd. His credit union offers a five-year 3.89% fixed rate mortgage, lower when you consider profit participation. Someone with a 4% mortgage last year borrowed at 3.7%, counting profits.
John Turner, director of mortgages with Bank of Montreal, said it comes down to lending costs for banks. "In general terms, our rates are competitive," he says.
Fair enough, but not today. And not in British Columbia for sure.
Source: Garry Marr, Financial Post