Why are fixed rates higher then they should be?
If you have been watching you will have noticed that the spread on the government of Canada long bonds to the five year mortgage rates has increased year over year. Last year the average spread was around 1.1% when compared to discounted wholesale five year rates and this year it has almost doubled.
Technically speaking we should be paying around 5% for a discounted five year rate today but instead we are around 5.89% to 5.99%.
As we have been discussing this has been blamed primarily on the US sub-prime mortgage mess and the resulting liquidity crisis. I for one also believe that it is because we are allowing the banks to get away with it.
Demand for mortgages, and I mean all mortgages is unchanged despite this problem of the banks increasing their spreads. This concerns me a little bit, because one would worry that the banks will not drop their spreads instead opting for increased profits in these uncertain times.
Alas, don’t despair, what I have learned from being in the wholesale mortgage industry for over 10 years is that Mortgage lenders are at their core cut-throat amongst each other to gain market share, and I think market share is more important to them then profits on the mortgage only. Consequently someone will come along and drop their spreads to grab market share.
Continue to use a professional mortgage broker because they will see these early drops first because it will happen in the wholesale market, likely not the retail branch network.
Greg Williamson, The Prez
