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Chartered banks shackle borrowers

Updated: Aug 15, 2018

by Neil Sharma 07 May 2018

With Bank of Montreal being the latest A-lender to hike its five-year fixed mortgage rate, chartered banks are effectively locking in borrowers and making it harder for them to switch lenders.

“Banks are losing some of their customers at the renewal stage to mortgage specialty companies, and this makes it harder to switch lenders at renewal,” said Elan Weintraub, a mortgage broker and director of Mortgage Outlet.

“The other thing it does is increase the profitability of banks because most people don’t pay posted rates, and if you break your fixed-rate mortgage during the term, the penalty is based on the discount you receive, so they’re essentially increasing that discount, which increases the penalty.”

The chartered banks’ rate hikes illuminate the advantages of putting borrowers in variable-rate mortgages. Clinton Wilkins of Centum Home Lenders Ltd. has always been a staunch advocate of variable rates, and says they’re preferable on insured mortgages.

“You can get a variable-rate product at prime minus 1.05%, so you get a variable-rate mortgage at 2.4%,” he said. “Why would you go with a fixed-rate product in the mid-threes? The spread is getting bigger between fixed and variable, and it’s going to drive more consumers to the variable-rate mortgage product.”

For 12 years, Wilkins has encouraged clients to take variable rates, even when other brokers promulgated the benefits of fixed-rate mortgages.

“I remember when the variable was an offering at prime minus 0.90% and then the spread started getting smaller and smaller and smaller,” said Wilkins. “I remember when the prime went down to 2.25% and I had clients at prime minus 0.90%, and their rate was 1.35% on the variable. I had clients at the exact same time who had a fixed-rate product at 5.25%. People who were in that variable product back in 2006 to 2008 basically won the lottery.”

Weintraub is also very partial to variable rate mortgages, however, he might be even more disposed towards psychographics.

“If someone tells me they’re extremely risk averse and they’re going to watch every news segment and read every newspaper article in fear, that needs to be factored into the decision,” he said. “It’s kind of a paradox; people think fixed-rate mortgages are less risky, but the reality is a significant number of people break their mortgage early and the penalty for a variable rate is substantially lower than it is for a fixed-rate mortgage. When you factor in that risk and the discounts, statistics show it’s safer to take a variable rate.”

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