Posted by: realtormarkpalace | December 8, 2010

Consumers Benefit from Canadian Mortgage Industry Trends

by Jim Adair

There are some people who will drive around to three or four different gas stations, looking for the cheapest price. Others will spend forever trying to pick out a new pair of shoes. But when it comes time to get a new mortgage, Canadians are pretty complacent, and it’s costing them a lot of money.

The recent annual report from the Canadian Association of Accredited Mortgage Professionals (CAAMP) shows that of homeowners who renewed their mortgages in the last year, 83 per cent stayed with the same lender they had before. But there are more mortgage choices available than ever before, and shopping for better rates and terms could make a big difference.

A report by Deloitte says the mortgage market share of bank branches is decreasing, a trend that is expected to continue. Mortgage brokers have enjoyed an increase in market share, but Deloitte says that share will remain flat going forward.

“Over the last decade, an increasing number of viable options for borrowers have surfaced,” says Deloitte senior manager Rob Galaski. “In addition to the traditional options available at bank branches, Canadians seeking a mortgage can now consult the bank’s mobile mortgage specialists, independent mortgage brokers and online sources. In this changing and more customer-friendly environment, the mortgage broker channel has emerged as a legitimate competitor that is helping provide greater choice and convenience.”

Galaski says there are many groups of people who can benefit from access to specialized lending services provided by mortgage brokers. “In particular, individuals who would have previously been faced with very few options due to their financial circumstances – such as new immigrants, the self-employed and individuals with credit challenges – now have options that were not previously available to them even a few years ago.”

One of the reasons consumers are reluctant to change mortgage lenders is because there are penalties for switching if the mortgage hasn’t reached the end of its term. Deloitte says the federal government is thinking of standardizing prepayment penalties. A typical penalty is either three months of interest or the difference between the existing rate and the rate the lender could charge in the current environment, which is called the interest rate differential (IRD).

“If new government regulations remove the IRD penalty as a barrier to switching, more consumers will likely switch mortgages in periods of declining rates,” says Todd Roberts, a consulting partner at Deloitte. “In the absence of stiff payment penalties, lenders will seek to minimize lost customers by building strong relationships through active cross-selling and retention strategies for at-risk groups.”

But to remain successful, mortgage brokers will have to evolve from “rate shoppers” to “advisors” says Deloitte. “To succeed in today’s hypercompetitive marketplace, mortgage brokers will start to offer value-added advice to Canadian mortgage holders similar to the way investment brokers have evolved from transactional to advice-based roles,” says the report.

It says the emergence of bank mobile mortgage sales forces is challenging the perception that only mortgage brokers can offer lower rates and better customer service.

The report says that unlike mortgage brokers in the U.S., the “Canadian mortgage broker channel is “strong and stable.”

CAAMP reports that mortgage brokers account for 25 per cent of all mortgages, and 40 per cent of new mortgages. But it says consumers remain cautious about switching lenders. Almost half of those obtaining a mortgage last year got only one mortgage quote or none at all. Twenty-four per cent got two quotes and just 18 per cent got three.

Canadians are also cautious about taking on variable-rate mortgages, even though they cost less than fixed-rate mortgages. Sixty-six per cent of Canadians go with the most common mortgage, a five-year fixed-rate loan. Only 29 per cent have variable mortgages and four per cent have a combination.

CAAMP economist Will Dunning says, “We can think of the difference between variable rates and fixed rates as the price of insurance that mortgage costs won’t increase in the next five years.” But he says the cost of that “insurance” has been much greater in the last two years than in the previous two years. The report says for those who financed or renewed a mortgage within the last 12 months, average rates were 4.17 per cent for fixed rates and 3.03 per cent for variable or adjustable-rate mortgages.

The fact that most people opted for a fixed rate “suggests that consumers are not giving much weight to relative costs of the two types of mortgages,” says Dunning. But he says it probably has “much more to do with consumers’ assessments of risks and perhaps even more with in-grained attitudes to risk.”

CAAMP’s report found that 84 per cent of Canadian mortgage holders could handle monthly increases of $300 or more in their mortgage payment. Overall in Canada, as of August 2010 there was more than $1 trillion in outstanding residential mortgage credit. But the mortgage arrears rate is stable at 0.42 per cent, “lower than for most of the 1990s,” says CAAMP.

Published: December 7, 2010

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