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Robert McLister: To maintain their market share, banks are pulling out all the stops
Published August 30, 2024 • Last updated 1 day ago • 4 minutes reading time
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The CEO of Royal Bank said the bank's mortgage business was now generating only a third of its previous revenue. Photo by Alex Lupul /The Canadian Press
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To say that the mortgage market in Canada is a tough battle would be an understatement.
Dave McKay, CEO of Royal Bank of Canada (RBC), the country's largest mortgage bank, admitted yesterday during a conference call that RBC is facing what he called “historic” and “intense competition.”
In fact, RBC is now earning only a third of its previous revenue from its mortgage business, he explained.
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“Our mortgage business is experiencing low interest rate margins driven by volatile funding costs and competitive pricing pressures,” the company added in an emailed statement today. “We believe these trends are impacting the entire industry.”
And RBC is right. They are.
With interest rates high, debt loads high and real estate activity weak, banks are desperately trying to maintain market share. Every mortgage broker I speak to tells me stories of clients who were offered amazingly low interest rates by their bank.
However, based on the advertising, you would not suspect that there is a price war.
For example, if you survey all national lenders right now, the average published rate for a three-year fixed-rate mortgage is 5.58 percent. That's a paltry deal compared to the best nationally advertised offer for an uninsured three-year mortgage: 4.84 percent from Pine Mortgage.
Imagine an unsuspecting first-time buyer trusting their lender and accepting an inflated interest rate of 5.58 percent. For the average first-time buyer taking out a $410,000 mortgage, according to Equifax Canada, this mistake would cost them $8,834 over 36 months.
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This makes price comparison more important than ever. But while you're shopping around for rates, beware of wolf-in-sheep's clothing offers. Some “special offers” are minimum-requirement mortgages that trap you with no options to transfer or remortgage.
This may not sound like a big deal, but a broker I work with recently told a cautionary tale that resonated. One of his clients was offered a “value” mortgage by his bank when renewing his mortgage. The borrower accepted the offer simply because he didn't have to reapply and the interest rate was slightly lower than what he had seen online.
Two years later, the man had to refinance early. The catch? The “Value” mortgage he had agreed to did not allow for refinancing without a heavy penalty.
The kicker was that he could have chosen a slightly more expensive option from the same lender that allowed penalty-free refinancing. He ended up saving $2,100 in interest over two years, only to be hit with a $23,000 penalty. Ouch.
On the hunt for “deals”
Borrowers typically save more when they choose mortgages with flexible contracts than when they have small upfront interest rate advantages. Here's a golden rule: If you're eyeing two interest rates and one of them comes with high prepayment penalties, limited portability or refinance restrictions, avoid it like a telemarketer if the savings are less than 10 to 15 basis points.
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The less flexible option should only be considered if you are absolutely certain that your financial needs will not change throughout the life of the mortgage. And I can tell you that in the 17 years I have been doing this, the majority of people who say they will not change their mortgage before maturity actually do so. Surprises happen, whether it is an unexpected need for funds for debt consolidation, investment purposes, education or emergencies, or an unexpected move, job loss, separation or illness.
Where should I look?
No lender wins a gold medal for offering the best overall deal across all terms. Finding the lowest loan costs requires legwork: online research, consulting with a broker or two, and checking terms directly with the lenders of your choice.
Generally speaking, brokers currently dominate the market for default-insured rates. But banks have cornered the market for uninsured rates, particularly at the three-year terms most borrowers covet, and especially at extensions.
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It used to be a sport for lenders to smack borrowers with high interest rates at renewal, betting they were too uninformed, too dissatisfied with their bank, or too stubborn to switch lenders. Those days are over. Most banks are extremely aggressive about retaining customers unless they think you won't qualify elsewhere. Wave a better offer from another lender and watch them spring into action. They simply can't afford to lose existing customers in a low-volume market.
All this competition may not be good news for bank shareholders, but it certainly benefits consumers.
Robert McLister is a mortgage strategist, rates analyst, and editor of MortgageLogic.news. You can follow him on X at @RobMcLister.
The rates shown below are updated by the end of each day and are taken from the Canadian Mortgage Rate Survey by MortgageLogic.news. Postmedia and Imaginative. Online Inc., the parent company of MortgageLogic.news, receive compensation from certain mortgage providers when you click on their links in the charts.
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