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Robert McLister: Borrowers better shop around for the best possible interest rate because the major banks in Canada won't offer that to you
Published on April 5, 2024 • Last updated 1 day ago • 4 minutes reading time
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Mortgage expert Rob McLister laments HSBC Canada's sale to Royal Bank because the deal means less transparency for mortgage buyers about the best interest rates on offer. Photo by Brent Lewin/Bloomberg
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HSBC Canada's mortgage business has entered a permanent pause. The Royal Bank of Canada just gobbled it up in the largest domestic bank merger in Canadian history. Good for RBC. Bad for Canadian mortgage buyers.
As a result of the deal, which closed last week, leading nationally advertised interest rates on several uninsured mortgage terms have increased. For example, the lowest published floating rate last week was 6.55 percent from HSBC. Today it's a less palatable 6.69 percent, according to Scotiabank eHOME.
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Prior to RBC's takeover, HSBC was regularly Canada's most aggressive and transparent lender. I've been reporting on HSBC's top interest rates for eight years. No longer.
Although the bank may not have had a large market share, it served an important function by keeping competitors honest in their published prices. Now that HSBC is no longer around, banks no longer need to be so aggressive with the interest rates they give you see (more on that in a moment).
We'll have to wait and see if a new torchbearer takes over the title of most transparent lender. The quoted bank interest rates are terrible compared to what brokers can receive, with only Scotiabank's online division eHOME being somewhat reasonable.
For now, mortgage brokers are leading the way, led by price cutters such as Butler Mortgage, Citadel Mortgage, True North, Ratehub and Nesto. While the lowest advertised bank interest rate for an uninsured variable is 6.69 percent, Butler advertises effective interest rates as low as 6.10 percent, including a cash refund. The interest rate is higher if the mortgage is less than $650,000 or the closing is more than 45 days away, but it is still well below the offers advertised by banks.
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However, keep in mind that by charging a slightly higher price for a traditional broker, you may receive more informed advice, faster service, and more approval options.
Elsewhere, borrowers get hefty discretionary discounts from banks like Toronto-Dominion. The green lender is flush with deposits and is on a market share boom. According to Sohrab Movahedi, banking analyst at BMO Capital Markets, TD is the Big Six market leader in Real Estate Secured Lending (RESL) and reported seven percent growth in the first quarter. According to Movahedi, TD is looking to expand its RESL portfolio to $500 billion from $384 billion in the first quarter, and borrowers are the beneficiaries.
HSBC was different
All major banks have hidden “discretionary” operations, but HSBC was a different beast. Interest rates were transparent, meaning HSBC borrowers didn't have to guess or negotiate. Compare that to the Big Six banks, where you have to play games to get the best interest rates. That's fine if you like to haggle and waste time, but for those who don't like to rant, overpaying is almost a given.
And God help the poor souls who just sign their renewal letters.
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“Look, people need to be aware of how they shop at renewal,” says discount mortgage broker Ron Butler. “Today the initial offers from all banks are 30 to 50 basis points too high.” (A basis point is one hundredth of a percentage point.)
“Everyone needs ammunition to challenge their incumbent lender… a quote from another lender on leverage,” Butler says. “Otherwise they will end up with a tariff that is too high.”
Worst of all are uninsured borrowers, unable to switch lenders because they are trapped by the government's mortgage stress test.
With the stress test, uninsured borrowers prove that they can afford an interest rate that is at least 200 basis points (bps) higher than the interest rate they actually pay. If you're in line for an extension and can't pass this test, you'll be locked into the potentially lousy interest rate your lender will pay you. The problem is so bad that the Competition Bureau of Canada had to do it Ask Parliament to exempt uninsured mortgage changers from the stress test. We will see whether the Treasury, political pressure or legislation persuades our banking regulator to do something about it.
Back to HSBC. The company was able to compete aggressively on price because financing costs were extremely low and mortgage discounts were offset by income from other products such as investments. This is a unique model that we may not see again for many years.
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Tips for saying goodbye
If you're up for a renewal or negotiating a new mortgage, here's a game plan to get a better deal:
- Maintain a credit score above 720 (many lenders use 680 to 720 as minimum scores, while more lenders are setting minimum scores such as 750 or 800 for their best interest rates).
- If possible, pay off non-mortgage and auto debt up to 30 percent of your credit limit to improve your credit score.
- Keep monthly debt payments and housing costs (mortgage payment, heating, property taxes and, if applicable, half of your condo fees) below 44 percent of your household's gross monthly income.
- Make sure you haven't missed any payments in recent years
- Get at least two mortgage brokers into a bidding war for your business. Ask them to beat what you see elsewhere for a mortgage with equal or better features.
- Try to get all competing rate quotes in writing.
- Start shopping four months before your expected closing date, but keep in mind that the best prices sometimes apply to closings within 30 to 45 days.
- Make sure your lender adjusts your interest rate if interest rates go down before closing.
- Never accept a lender's first offer – it's just a warm-up offer.
- If you are risk tolerant and have a comfortable financial cushion, consider a shorter or variable interest rate (e.g. a three-year fixed rate if the mortgage is uninsured or a variable rate if it is insured against default) .
Every 10 basis points you save per $100,000 in mortgage saves you about $480 over five years with a 25-year amortization. Translation: Lace up for some serious price shopping—it's worth it.
Robert McLister is a mortgage strategist, interest rate analyst and editor of MortgageLogic.news. You can follow him on X below @RobMcLister.
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