Pressure on lenders to adjust mortgage portfolios

Not so long ago, one was able to obtain a prime minus 0.80% (P-.80) or better which meant you would currently have an interest rate at 2.20% or better, and now the lenders have decreased that discount to prime or even P-.010%, with a few holdouts still in the p.-30% to p.-40% range.

Once those holdouts make their move along with the rest of the herd, some analysts are expecting to see that prime might be the new norm, meaning that there won’t be any discounting.

There has been a lot of consumer movement this past year to the variable rate and that’s put a lot of pressure on the lenders to adjust their mortgage portfolios.

Lenders typically prefer to have their mortgage portfolios weighted about 70% fixed and 30% variable, but with the global developments over the past few years many have had to re-look at their books and make some adjustments as some lenders are becoming too heavily weighted on the variable side.

I read somewhere that one particular lender is carrying close to 50% of its portfolio in the variable side and that it may become unmanageable for them.

Prior to the great recession of 2008, as a percentage, consumers with a variable rate have saved money versus their counterparts on the fixed side. Yet, during that time period over two-thirds of Canadians still went with the safety of the fixed rate.

Looking back one wonders why more hadn’t gone with a variable, but psychological factors come in to play – comfort vs. risk. Canadians generally do not like risk, and there’s nothing wrong with going with a fixed as I’ve advised many of my clients to go with a fixed rate simply because their incomes couldn’t handle much of a fluctuation in payment.

With five-year fixed rates even stronger than one could ever have imagined even six months ago, never mind three years ago, it’s tough to look at the down sides of either.

Prior to this past August five-year fixed rates were never better than 3.39%, then the U.S. congress set fear across the globe along with further deepening European debt crisis and the bond rate tumbled to a new all time low.

At this time, ATB dropped their 5-year fixed down to 3.09% for about two and half weeks, but other lenders just didn’t come close to competing with that and the best fixed rate sat at 3.29%.

The best five-year fixed currently sits at 3.34% for the time being but there is some upward pressure as North American economies are gaining employment momentum.

With the current spreads between fixed and variable being so small, just over 60 basis points, and that figure to be shrunken further shortly enough, the five-year fixed is going to look even more attractive if they stay flat for the next little while.

With going into the winter months, I am not expecting much of an increase to the fixed rate, but we are definitely in times where one never says never as no one expected variable discounts to all but go away.

Jean-Guy Turcotte is an Accredited Mortgage Professional at Dominion Lending Centres-Regional mortgage Group and can be contacted for appointments or questions at 403-343-1125, texted to 403-391-2552 or emailed to jturcotte@regionalmortgage.ca

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