If you love a good conspiracy story – I’ve got one for you!
Banks make over a Billion dollars profit, per fiscal quarter. Good business to be in.
A very small sliver of that profit is from Banks collecting Mortgage penalty fees from their customers who break their Mortgage contract before the completion date.
Breaking a Mortgage is never the plan.
I plan on fulfilling my Mortgage commitment. As you and I both know, plans change and that means breaking my Mortgage early.
When breaking a Mortgage lenders charge a penalty for leaving early.
In Canada, Mortgage payout penalty formulas are not regulated by any level of Government. Each Bank has lateral movement to create their own Mortgage payout penalty formula.
And guess what? Big branded Banks have the most expensive Mortgage payout penalties in the industry (shocking). They don’t like it when a Mortgage (an asset on their balance sheet) goes away.
You might have been seeing Canada’s bond market drop lately? This is where the pricing of fixed Mortgage interest rate are derived. Basically, Mortgage rates have been falling.
So what? Isn’t that good?
Yes. Borrowing money is cheaper.
Follow me here …
Consumer Mortgage rates are dropping but posted Mortgage rates are not dropping? A posted Mortgage rate is a factor in the Banks Mortgage penalty formulas.
And this is the Red Herring …
Unsuspecting Canadians arranging their Mortgage at big branded Banks, or with any lender who uses posted Mortgage interest rates in their Mortgage penalty formula, will be paying through the nose IF they break their Mortgage before end of the term.
In these secret Mortgage penalty formulas, and buried in the fine print of the branded Banks Mortgage documents, are their Mortgage penalty formulas. And some of the formulas include a “discount” from the posted Mortgage rate to the actual Mortgage contract rate. Seems innocent enough – even quite charming of the Bank to be so generous.
Wrong.
The discounts from the posted Mortgage rate, at the time your Mortgage was arranged, are the crippling factor in the future Mortgage payout penalty formula.
There might be layers to this conspiracy theory …??
The posted interest rates in Canada influence the “Mortgage Qualifying Interest Rate” (MQR). This is the stress test interest rate.
Canadians with less than 20% down payment need to qualify to make their Mortgage payments at the MQR which today is 5.34%. It’s possible there is pressure from other interest groups in Canada NOT to lower the posted rates because that would increase housing affordability.
Maybe this is a bit of a stretch? Maybe not?
I am reading the Department of Finance (DoF), the Office of the Superintendent of Financial Institutions (OSFI) and the Bank of Canada (BoC) are relativley happy with the quality of debt Canadians are taking on. I’m not sure they would be big fans of lowering the Mortgage Qualifying Rate?
What do you think?
I thought you would be interested in what I’m seeing in the Canadian Mortgage lending space and thoughts I have.
When you’re ready, connect with me about buying, selling your home, OR refinancing or renewing your Mortgage.
Talk soon,
Chad Moore
