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Why you should care about the banks’ posted rates on mortgages


There are not too many Canadians who get tricked into accepting the posted rate on a mortgage anymore but that doesn’t mean no one should care when the banks drop their published rates.

About a week ago, Bank of Nova Scotia lowered its posted rate on a five-year fixed rate mortgage to 4.49% from 4.79%, which doesn’t sound like much of a deal when compared to the discounted rate of 2.84% for the same product, according to The other banks have not matched the posted rate from Scotiabank — which is important because if they do it’s going to get easier for consumers to borrow even more money.

What’s key about the posted rate is that it is used by the Bank of Canada to create what is called the qualifying rate. The prime rate is 2.85% today, and you borrow at even less, but if your mortgage is for a term under five years, you qualify based on the posted rate — meaning you must borrow based on a higher monthly payment which ultimately means you can take on less debt.

Household debt continues to be cited as worrisome by many who watch the economy. The McKinsey Global Institute last week pointed to Canadian consumer debt as unsustainable. Statistics Canada said debt reached a record 162.6% of disposable household income in the third quarter.

Rob McLister, founder of, says that every Wednesday the Bank of Canada surveys the big six banks, and posts the qualifying rate based on the five-year mortgage posted rate. One bank isn’t enough to move the rate.

“If the posted rate went down materially, 30 basis points, like Scotia just did, it will have a meaningful effect for some people on the bubble,” he says, noting it’s been almost nine months since the qualifying rate moved. “In my opinion, Scotia dropped because they want to seem more competitive, even though most people know it means nothing.”

But it does affect people qualifying for loans based on prime, which according to the Canadian Associated of Accredited Mortgage Professionals, is usually about 25% of the population — but it’s shot up as high as 30% when there is a large gap between prime and long-term rates.

Clearly worried about consumer exposure to interest rate shocks, Ottawa moved a few years back to force consumers to qualify based on the posted rate or lock in mortgage rates. Lock in your rate for five years or longer and you can use the low rate on your contracts — as opposed to the posted rate — to get a larger loan than you might otherwise be able to get with a variable rate mortgage.

Will Dunning, chief economist with CAAMP, says in his group’s surveys he has rarely found anybody actually taking the posted rate.

“It really just exists for administrative purposes but it has real consequences,” said Mr. Dunning, noting the posted rate is also used for the bank to calculate penalties for people breaking mortgages. When posted rates are lowered, the penalties go up for consumers who have to pay interest rate differential penalties to back out of a loan.

Mr. Dunning says a drop in the posted rate would squeeze a few more people into the housing market but most first-time buyers are very conservative buyers and lock in their rate for five years or longer, leaving them unaffected by any drop in posted rate.

However, with the Bank of Canada meeting again in March, and another cut possible, the temptation to go with a floating rate could grow if the banks follow with another cut to prime. And a lower qualifying rate would allow more consumers to take advantage of that scenario with all the risks that comes with floating rate debt.

Calgary area housing starts plunge in January

A dramatic plunge in new home construction in the Calgary region could be a prelude of what’s in store for the city’s economy this year as the impact of the precipitous decline in oil prices takes hold.

Canada Mortgage and Housing Corp. reported Monday that total starts in the Calgary census metropolitan area dropped by 43.8 per cent to 747 units in January from 1,328 units in January 2014. The multi-family sector saw a drop of 50.7 per cent to 430 units from 877 while the single-detached market experienced a 29.7 per cent decline to 317 units from 451.

While storm clouds loom in the economy, an RBC Economics report suggests a rebound in oil prices, starting by the middle of this year, will help Alberta avoid a recession.

The report, by senior economist Robert Hogue, said an uptick in prices will “help rebuild confidence in the province and prevent activity from entering a full-blown contractionary spiral.”

While Hogue’s analysis says the province won’t see a recession, it suggests a dramatic slowdown in economic growth — it forecasts real GDP growth of 0.6 in 2015, down from 2.7 predicted in the bank’s December outlook. GDP growth was 4.1 per cent in 2014.

Todd Hirsch, chief economist with ATB Financial, said economists track housing starts because they are a barometer for the rest of the economy.

“Not only do they give a strong indication of consumer confidence but they also do have this ripple effect,” said Hirsch. “So when you build a new house, you put new flooring in it, you put new furniture in it, you put appliances in it. All of these things which go beyond just the housing sector into the retail and the wholesale trade.

“There are definitely ripple effects when a new house is built that go beyond just the construction of it.”

Hirsch said the drop in housing starts in the Calgary region is a prelude of what is to come this year for the city’s economy.

“But the glass-is-half-full side is that actually if housing starts do come down it will prevent too much inventory from going on the market,” he said. “If these home builders in Calgary keep churning out homes and there’s no buyers we may end up with a big, big price correction and then everyone’s going to be concerned about that.”

Felicia Mutheardy, senior market analyst in Calgary for the CMHC, said a moderation in the pace of job creation, coupled with slower inflows of migration to the region contributed to the overall decline in housing starts.

“Active listings in the competing existing home market have also been on the rise, with more notable increases in recent months. This offers buyers additional choice, easing some of the demand pressures in the new home market.”

While Calgary saw a plunge in starts, Alberta saw an increase of 27.7 per cent to 44,800 (the annualized rate), which was well above the 12-month trend, said Benjamin Reitzes, senior economist with BMO Capital Markets, in a research note.

“With home sales in the province already dropping, starts are likely to follow suit in the next few months,” he said.

In his report, Hogue said a significant drop in capital spending plans by oil companies will have a direct impact in reducing the province’s economic growth.

“Indirectly, the effect will spread to employment, net migration, the housing sector, consumer spending and, possibly, public sector spending,” he said.

Hogue said the updated forecast also assumes substantial job losses in Alberta for the first half of the year — with employment falling by as much as half the jobs created in 2014.

“Our forecasts also assume some partial reversal during the second half of this year amid rising oil prices and rebuilding confidence,” said Hogue. “Deteriorating job prospects in the near term likely will moderate net in-migration into the province, which has been very strong in recent years.”

The report said softening demographic fundamentals likely will weigh on Alberta’s housing sector.

“Already there are signs of impending housing market downturns in Calgary and Edmonton, although these so far primarily reflect a loss of confidence caused by the sharp drop in oil prices rather than weaker population growth,” said Hogue.

The report projects home resales will decline by nearly 16 per cent in 2015 in Alberta and housing starts will moderate from 40,600 units last year to 27,500 units this year. But it also expects home prices to stay relatively flat, down just 0.5 per cent overall in the province, “reflecting the fact that the market was initially in a position of strength to withstand much of the hit.”

After a likely flurry of layoffs in the first half of the year, Hogue said he would expect that businesses will start hiring again later this year.