Canada's market heats up as RBC battles shrinking margins and intense lender competition
Canada's mortgage market is currently facing intense competition, with Royal Bank of Canada (RBC) feeling the strain, as reported by Financial Post.
RBC, the country’s largest mortgage lender, is experiencing significant pressure in its mortgage business, with earnings now only a third of what they once were.
During a recent conference call, RBC's CEO Dave McKay described the competition as “historic” and “intense.”
The bank's mortgage margins have been squeezed due to volatile funding costs and competitive pricing pressures. RBC acknowledged in a statement that these trends are impacting the entire industry.
In response to high interest rates, large debt burdens, and a sluggish real estate market, banks are fiercely competing to maintain their market share.
Mortgage brokers have reported that customers are being offered surprisingly low rates by banks, even though advertised rates do not always reflect the best deals available.
For instance, the average published rate for a three-year fixed mortgage from national lenders is currently 5.58 percent, which is considerably higher than Pine Mortgage’s best nationally advertised rate of 4.84 percent for an uninsured three-year term.
This disparity in rates can have a significant financial impact on borrowers. According to Equifax Canada, the average first-time buyer takes out a $410,000 mortgage, and choosing the higher rate of 5.58 percent could cost an additional $8,834 over three years.
This situation highlights the importance of comparison shopping for mortgage rates. However, while hunting for the best rates, borrowers need to be cautious of seemingly attractive offers that come with restrictive terms.
Some of these “special offers” are bare-bones mortgages that may lack options like portability or refinancing without penalties.
A mortgage broker recently shared an example where a client accepted a “value” mortgage at renewal because it required no re-application and had a slightly lower rate than others he had seen online.
Unfortunately, when the client needed to refinance two years later, he faced a significant penalty because the mortgage did not allow for early refinancing.
Although he saved $2,100 in interest over two years, he was hit with a $23,000 penalty, a harsh reminder of the risks associated with restrictive mortgage terms.
Borrowers often benefit more from mortgages with flexible contracts rather than those with minor upfront rate advantages. A good rule of thumb is to avoid mortgages with significant prepayment penalties, tight portability, or refinance restrictions unless the savings are at least 10 to 15 basis points.
Even then, borrowers must be sure that their financial needs will not change during the mortgage term. In most cases, unexpected life events, such as a need for debt consolidation, a job loss, or relocation, can lead to changes in mortgage requirements before the term ends.
Finding the best mortgage deal requires effort, including researching online, consulting brokers, and verifying terms directly with lenders.
While brokers tend to dominate the default-insured rate market, banks are increasingly competitive in the uninsured space, especially for three-year terms and renewals.
In the past, banks often relied on borrower inertia to retain customers at high renewal rates, but today’s competitive environment forces them to match or even beat other offers to keep clients.
This heightened competition may not please bank shareholders, but it is clearly benefiting consumers by providing them with better mortgage options.
As the market remains low in volume, banks cannot afford to lose customers, making this a favourable time for borrowers to secure advantageous mortgage terms.
