Research released by the Bank of Canada Thursday, not surprisingly suggests that Canada’s largest banks are slow to pass on cuts in the Bank of Canada’s policy interest rate.
“Canadian lenders appear to be extremely slow to pass on changes in the Bank Rate to their customers,” author Jason Allen wrote in the report entitled “Competition in the Canadian Mortgage Market.”
Researchers found that “in the short run, five of the six largest Canadian banks adjust their rates upward more quickly when there are upward cost pressures than downward when costs fall,” he said.
Having market power in Canada, “there is scope for banks to coordinate implicitly or explicitly,” Allen wrote.
If costs rise they all want to increase their prices, but if costs fall they wait before reducing rates “because all the banks can earn higher profits.”
Vince Gaetano, vice-president and principal broker with MonsterMortgage.ca is not surprised by the report, calling the banks’ practice of holding off discounting for longer periods “common practice.”
He said banks usually lenders hold off until after the end of the month before passing on lower rates because this is when renewal notices for maturing mortgages are printed and issued in advance of the maturity date.
“Renewal notices with a higher rate printed on them provide the illusion of a potentially bigger discount that can be offered to the client – a client who most times does not want to put in the effort in the mortgage transfer process.”
Dave Larock, a broker with Integrate Mortgage Planners-TMG in Toronto said there is another group affected – borrowers who are just about to close their mortgage transaction. “Since most rate drop policies are in effect until seven days prior to closing, it is this group that misses the savings if rate drops are delayed,” he said. “From a lender’s perspective, this group is not very rate sensitive because they are so close to their funding date that switching lenders is usually not feasible, while mortgage applicants who are earlier in the process will eventually receive the lower rate through any standard rate-drop policy, provided that the rate decrease is sustained.”
The research also indicated that borrowers who use a mortgage broker pay less, on average, than borrowers who negotiate with lenders directly. This average discount is about an additional 19 basis points.
“The conclusions of the report are very reasonable,” said Jim Murphy, president and CEO of CAAMP. “They coincide with our own research at CAAMP on discounts. Mortgage brokers play a key role in offering choice to borrowers when making their most important financial decision.”
Larock said he agrees with the paper’s overall premise that more lending competition leads to better rates and choice for consumers and that in today’s market banks can coordinate implicitly or explicitly. “That’s just the nature of an oligopoly,” he said. “If Canada’s big banks were allowed to merge they would increase their market muscle at the customer’s expense. We need more lenders, not fewer.”
The report stated that Canada’s mortgage market represents “almost 40 per cent of total outstanding private sector credit, BOC researchers said in the quarterly Financial System Review.” It is dominated by the nation’s six major national banks plus a large credit union, the Desjardins Movement, and the Alberta province-owned ATB Financial.
The “Big Eight” controls 90 per cent of the assets in the banking industry. All offer the same types of mortgage assets, the great bulk of these being guaranteed by the federal government’s Canada Mortgage and Housing Corporation.
“The Canadian mortgage market is relatively simple and conservative, particularly when compared with its U.S. counterpart,” the report stated. “Many Canadians sign five-year, fixed-rate contracts for the life of the mortgage -- typically 25 years.”
Bruno Valko, director, national sales for Resmor Trust said there is an advantage because the mortgage broker marketplace is not dominated by a few big players.
“In the broker/wholesale channel, there’s more competition and lenders will move quicker to lower rates and attract business when the opportunity presents itself,” he said. “Furthermore, the scale of product offerings is greater, so in the event a person doesn’t qualify at the Big Eight, a broker can potentially offer solutions.
“And if we agree that the broker/wholesale channel moves quicker to lower rates when the opportunity presents itself, that's another advantage for consumers to choose mortgage brokers.”