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GIC Rates Up Again
April 20, 2022
11:20 am
Norman1
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Loonie said
My head is spinning.
How can a mortgage which costs 3.5 or 4% be turned into something that only pays the lender 2.7%?

Not all mortgages are CMHC insured. Mine never was as we put down more than the minimum. However, Equitable's may not fit that category.

Equitable Bank would likely refuse that 3.64% 5-year rate for an uninsured mortgage. I found out years ago that some of those really good mortgage rates are for "high-ratio prime mortgages only" for which the borrower pays for the mortgage insurance.

The difference between the 3.64% rate on the mortgage and the mortgage investor's 2.7% return covers the origination costs and the ongoing mortgage administration costs. The origination costs include the mortgage brokerage commission for finding the borrower. CMHC requires the insured mortgages to be administered by an NHA-approved lender.

April 20, 2022
12:37 pm
Loonie
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All I can say is that we did get the best available rate at the time without consulting a mortgage broker. All the banks we consulted would have been happy to accept our business; CUs had worse rates at that time. If there had been higher rates advertised with whatever conditions, we would definitely have known about them.

If those are the fees, then they seem quite expensive considering set-up is a one-off deal and rates are for the duration

April 20, 2022
1:27 pm
Alexandra
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I never paid mortgage insurance either as always had considerable down.

A lady I knew years ago had her small war time house all paid for. Then she met a nice gentleman and they got married. She was a fair amount older than him. Maybe then she was around 56 and he 40? Anyway, they decided to sell the paid off house and purchase a high end townhome. It required a substantial mortgage. They were required to purchase a life insured mortgage. He had a full time job but it was a lower paying one. She just worked part time @ minimum wage.

To make a long story short, he died suddenly about a year after the purchase of this expensive townhome. Because they had the mortgage life insured, when he passed away, her property was totally paid off.

April 20, 2022
1:51 pm
Loonie
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Great financial outcome for that lady.
We had conventional life insurance, which would have more than paid off the mortgage. It's cheaper. But he may not have been able to get it if he had health issues.

April 21, 2022
4:02 am
JenE
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EQ 5 year rate is now 4.05%

April 21, 2022
7:27 am
Norman1
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Loonie said
All I can say is that we did get the best available rate at the time without consulting a mortgage broker. All the banks we consulted would have been happy to accept our business; CUs had worse rates at that time. If there had been higher rates advertised with whatever conditions, we would definitely have known about them.

If those are the fees, then they seem quite expensive considering set-up is a one-off deal and rates are for the duration

It depends on the lender, whether it is originating the mortgage to keep for itself or to flip to a mortgage pool to service afterwards. Lenders who originate to service will have better rates for high ratio mortgages.

Right now, Meridian CU is offering 5-year closed fixed-rate mortgages for 3.99%. But, if the mortgage is high-ratio, then the rate drops to 3.54%. Could be worth it to pay the one-time CMHC insurance premium for the reduction in rate.

CMHC allows at least ½% spread between the mortgages in the pool and the yield on the pool's mortgage backed securities to compensate the lender for originating and servicing the mortgages. There is a cost to "manufacturing" the mortgage, even when a mortgage broker is not involved. The branch mortgage specialist is not free either.

This is from the information circular of Pool 86701961 that was issued by Equitable Bank in June 2017:

Servicing of Pool

The Issuer [Equitable Bank] is responsible for servicing and otherwise administering the mortgage loans which constitute the pool in accordance with generally accepted practices of the mortgage lending industry.

The monthly remuneration of the Issuer, for its servicing and administrative function, will be the excess of interest at the stated interest rates on the mortgage loan(s) over the interest at the stated rate on the certificates. That amount shall be withheld by the Issuer out of interest payments collected on the mortgage loans. Each mortgage loan in the pool bears an interest rate at least 0.5 per cent higher than the stated interest rate on the certificates on the date of issuance. Late payment fees and similar charges collected (excluding penalty interest charged for certain unscheduled prepayments of principal as set out in the addendum to this Information Circular) will be retained by the Issuer as additional compensation. Payments due to Investors will not be delayed. The Issuer shall bear all costs and expenses incident to the servicing of the mortgage loans. These late payments, fees, costs and expenses will not reduce the monthly payments due Investors as described above.

April 21, 2022
1:40 pm
Loonie
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Granted it was a long time ago, but I don't see a reason to think ours went to a pool. it was one of the Big Six or Seven banks, we did not negotiate the rate much or at all (can't remember details), high deposit, good credit rating, employment. No mortgage insurance or CMHC. Very ordinary circumstances. The rate at that time was 12% on five year term, that much I remember clearly.

April 21, 2022
1:57 pm
Bill
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As the original lender usually continues to service the mortgages I don't think you'd usually know if your mortgage has been flipped to someone else.

April 21, 2022
2:46 pm
Loonie
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No, you wouldn't know, but, according to what Norman has reported, it seems banks like EQ may do more of this. I don't get the impression banks exist for the purpose of flipping, and it would not be their preference. The bigger banks are more choosy about who they lend to and I'm guessing therefore less likely to flip, but I could be wrong. Norman told me earlier that a big bank would not originate a mortgage unless it had a matching GIC so that doesn't suggest any flipping at all. I'm not yet convinced this is true, however.

April 21, 2022
9:45 pm
Norman1
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The Big Banks don't need to flip the prime mortgages they originate. They normally can issue bonds and GIC's at much lower rates than alternative lenders like Equitable Bank can. As a result, they can earn more than the 1% spread that alternative lenders do on prime mortgages.

For example, Royal Bank, in their report for Q1 2022 ending January 31, 2022, disclosed that they have $338.2 billion of residential mortgages on their own balance sheet. They administer about $15 billion of residential mortgages that have been securitized to investors and no longer on their balance sheet. They flip only about 4% of the residential mortgages to investors.

April 21, 2022
10:20 pm
Loonie
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Right. So that's why I have reason to believe my mortgage was not flipped, as it was at a large bank.
However, as I said, there was no mortgage insurance or life insurance or CMHC involvement.

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