Banking giant on how trend is cutting into profits
The Canadian mortgage market is heating up as lenders aggressively compete to maintain their market share. Royal Bank of Canada (RBC) chief executive Dave McKay described the current environment as "historic" and marked by "intense competition."
During a conference call, McKay highlighted the significant impact this rate war is having on RBC's mortgage business, which is now earning just a third of what it used to.
“Our mortgage business is seeing low-interest margins driven by a volatile cost of funds and competitive pricing pressures,” RBC said in a statement. “We believe these trends are impacting the entire industry.”
RBC's acknowledgment underscores the broader challenges faced by Canadian lenders. As interest rates remain elevated, debt levels rise, and real estate activity slows, banks are pulling out all the stops to attract and retain customers.
Mortgage brokers report that customers are being quoted astonishingly low rates, often far below advertised rates.
For example, the average published rate for a three-year fixed mortgage from national lenders currently sits at 5.58%. However, some lenders, like Pine Mortgage, are offering significantly lower rates – down to 4.84% for uninsured three-year mortgages.
Read more: Canadians balk at rising homebuying costs and mortgage barriers
The difference could cost an average first-time homebuyer, who typically borrows around $410,000, an additional $8,834 over the term of the loan, according to Equifax Canada data.
However, mortgage strategist Robert McLister warned that not all low-rate offers are equal. Some "special offers" come with significant restrictions, such as the inability to port or refinance the mortgage without incurring heavy penalties.
“Some ‘special offers’ are bare-bones mortgages that trap you without porting or refinancing options,” McLister said. “That may not sound like a big deal, but a broker I work with recently shared a cautionary tale that resonated. One of his customers was offered a ‘value’ mortgage at renewal by his bank. The borrower simply took the deal because he didn’t have to re-apply, and the rate was a little lower than what he saw online.”
Two years later, when the borrower needed to refinance early, he discovered that his mortgage didn't allow refinancing without a substantial penalty. The borrower ended up saving $2,100 in interest over two years but faced a $23,000 penalty for early refinancing.
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