People Get Squeezed on Mortgage Renewals

—The Mortgage Report: Weekend Edition—

• Renewal Tax: Borrowers get worse deals on mortgage renewals than on brand new mortgages. And it’s been that way for decades. Interest rates on renewals have historically been about nine basis-points (0.09%) higher than rates on new mortgages. That’s based on a survey of five-year uninsured mortgages from 19 of the largest federally regulated lenders (source: OSFI). Less-aggressive rate shopping at renewal explains part of this “renewal tax.” Most borrowers settle for higher rates simply to avoid the inconvenience of switching lenders. And lenders know that. Interestingly, the rate differential as of January was double the normal spread at 18 bps, says OSFI. That means $1,200+ more interest over five years on a $300,000 mortgage. Part of this increase may be due to OSFI’s failure to afford a “stress test” exemption to renewers wanting to switch lenders for a better deal. That has effectively trapped a small percentage of borrowers at their existing lender, compelling them to pay higher rates. (OSFI exempts lenders from having to apply the stress test to existing borrowers who simply renew.) To date, the regulator has refused to address this problem, saying there’s no evidence of “significantly higher” rates for renewers since the stress test began. Its idea of “significant” is apparently different from others. In any event, OSFI has told us in the past that the data it relied on to draw this conclusion doesn’t break down renewal rates by borrower qualifications. So there’s no way to tell if people with higher debt ratios (who are less able to pass the stress test) are now getting worse rates, relative to other borrowers. The regulator’s data is therefore largely inconclusive.

• Affordability Strain: “Ontario was the only province where affordability deteriorated last quarter,” reports RBC. And don’t be surprised if “economic hardship causes potential buyers (especially first-time buyers) to delay their purchasing plans, and financially-strained owners (including investors) sell their property once support programs run out,” the bank says. “We believe the scale will tip in favour of buyers in many markets across Canada and (benchmark) prices will fall modestly, possibly as early as this summer.”

• Stressful Pre-approvals: Here’s a tale about pre-approvals. The story leaves out important details but conveys three good lessons: (1) don’t expect fast response times from lenders with the lowest rates; (2) allow plenty of time to arrange financing on a home purchase; and (3) pre-approvals sometimes aren’t worth the paper they’re written on.

• Branch Casualties: COVID has “accelerated” HSBC’s move away from branch banking. The world’s sixth-largest bank is slashing 35,000 jobs globally. Canadians have seen the fruits of its online push already with HSBC advertising some of the most aggressive nationally available mortgage rates since 2017. Each quarter that our Big Six banks fail to aggressively counter HSBC’s online mortgage push is another quarter banks give up share to this threat that is the Hongkong and Shanghai Banking Corporation. Fintechs who think they’ll dominate e-lending should also be put on notice. Massive banks can pivot into online mortgage origination faster than they think, and mega-banks have far lower funding costs. HSBC epitomizes both points.

• Cooling Market: Economists’ home price estimates have fallen at least 3% since March, according to a Reuters poll. Given the severity of this recession, that implies a much softer landing than many had feared.

• Quotable: “The experience of Japan over the past 25 years provides a compelling counter-argument to those who believe that the huge injection of monetary stimulus in other developed economies in recent months will inevitably lead to a jump in inflation.”— By Neil Shearing, Chief Economist, Capital Economics