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Credit unions: A cheaper, under-the-radar mortgage option – Ask a Vancouver Mortgage Broker

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When you last shopped for a mortgage, did you consult with a credit union? If you’re like more than four out of five recent home buyers, you didn’t.

Most mortgage shoppers overlook credit unions (CUs) because they think the rates aren’t good enough, or CUs aren’t convenient enough, or that they’ll save more by consolidating banking at their bank. But credit unions are dead set on changing those perceptions, and they’re fuelling mortgage competition in the process.

We saw that competitive spirit in February when Meridian, the country’s fourth-largest credit union, became the first major financial institution in 2014 with a five-year fixed mortgage under 3 per cent. That first mover advantage paid off. “Our pipeline of mortgages is double what it was last year,” says Meridian chief member services officer Bill Whyte.

And just this month, Ontario’s DUCA Financial Services launched the lowest five-year fixed rate in the country through select mortgage brokers.

As we speak, the top 10 CUs are advertising five-year fixed rates that average 0.56 percentage points lower than the top 10 banks, according to RateSpy.com. That’s not including the profit sharing that some CUs pay mortgage customers. These “member dividends” can range up to $200-plus per year for every $100,000 of mortgage.

Of course, banks can and do offer “discretionary” rates below their advertised rates. But discretionary rates aren’t visible on the Internet, where four out of five consumers go to research mortgages. That benefits credit unions, to the extent they publish lower advertised rates.

Like credit unions, banks are also recognizing that low rates can sell themselves. Bank of Montreal’s much-publicized 2.99-per-cent promotions helped make it No. 1 among big banks in mortgage market share growth since 2012. And now we’re seeing other banks jump on that bandwagon, including Bank of Nova Scotia and Toronto-Dominion Bank, which both ran sub-3 per cent five-year fixed specials this spring.

But credit unions are going a little further to win mortgage share, and people are taking notice. In 2013, CU mortgage portfolios grew 58 per cent faster than the overall market. And they show no signs of letting up.

CUs kicked their mortgage campaigns into high gear last summer. And the market share growth chart at the bottom of this column shows it. Credit union analyst David McVay, of McVay and Associates, attributes that growth spurt largely to credit unions’ “aggressive pricing.”

But low rates aren’t their only edge. CUs also pitch that they are member owned, not owned by outside investors. They don’t have to pay dividends to 3rd-party shareholders, which lets them work on smaller margins and/or pay dividends to their customers instead.

Regulation is also an advantage. “Being provincially regulated, we have more mortgage options available to our members than the big banks,” Meridian’s Mr. Whyte says, “… and we’re appropriately leveraging that, albeit not cutting any corners.”

Those mortgage “advantages” vary widely by credit union, but can include higher borrowing limits on a home equity line of credit, 35-year amortizations for those putting down 20 per cent or more, 100 per cent financing and easier qualification rules for conventional variable-rate mortgages and terms less than five years.

But if credit unions are so great, why do they have a piddly 8 to 13 per cent of mortgage market share, depending on whose statistics you believe?

Awareness is a major challenge. CUs don’t have $200-million to $300-million a year to spend on marketing like the banks do. “I would suggest we haven’t got our story out there about how co-operative banking is an alternative to the banks … and the fact that we can do almost everything the banks can do,” Mr. Whyte says.

To counter that, CUs are increasingly running high-profile rate specials, some of which are being picked up by the media. They’re also doing a lot of joint marketing. Last year, for example, a group of Ontario credit unions got together to promote co-operative banking. They’ve never done that before, Mr. Whyte says.

One area where banks outclass most credit unions is mortgage funding, an area where credit unions are clearly not created equal. However, the larger CUs – Vancouver City Savings Credit Union, Coast Capital, Servus and Meridian – can compete with the big banks through their access to millions of dollars of cheap deposits, their main source of mortgage funding.

After deposits, the next cheapest way to fund mortgages is securitization – i.e., packing mortgages and selling them to investors. And CUs are securitizing like never before. In Ontario, for example, CU mortgage securitization grew 36.2 per cent last quarter, dramatically faster than the industry.

Compared to the big boys, smaller credit unions don’t have as much low-cost capital, so they’re often not as competitive on rates. But even there you can find exceptions, like Toronto’s Slovenia Credit Union and its 2.89-per-cent five-year fixed.

The Internet is the great equalizer for micro-credit unions like Slovenia. Whenever they have excess deposits to lend out, they can cheaply advertise ultra-low rates online to thousands of potential customers. “The Internet will help [credit unions] level the playing field with the big banks,” Mr. Whyte adds.

The Internet also makes it easier to attract new customers. Meridian, for example, is launching a new website next month that lets people join the credit union online, instead of driving to a branch.

Despite their co-operative spirit, however, CUs have an uphill battle to steal share from the dominant banks. Banks are ubiquitous and perceived safe, so people park most of their accounts with them. Moreover, consumers’ preference for one-stop financial shopping gives banks an edge in the mortgage game.

But mortgages are a big deal to CUs too. They account for about half of their revenue and roughly 60 per cent of the loans they make. Furthermore, mortgages give them a chance to cross-sell things such as credit cards, GICs and RRSPs.

So despite being around for 113 years, this is only the beginning for Canadian credit unions in the mortgage market. They’re going to battle to the bone for your mortgage, and the competition they incite will benefit all borrowers.

Editor’s note: A previous version of this story mis-identified Mr. Whyte.

Robert McLister is a mortgage planner at intelliMortgage Inc. and founder ofRateSpy.com. You can follow him on Twitter at @RateSpy and@CdnMortgageNews.

Follow Robert McLister on Twitter: @CdnMortgageNews

Don’t get complacent about risks of housing downturn, OSFI warns lenders and insurers – Consult with a Vancouver Mortgage Broker

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Canada’s top banking regulator is urging mortgage lenders and insurers not to grow complacent despite healthy bank capital levels and predictions of a soft landing in the housing market.

In a speech at a C.D. Howe Institute housing conference on Thursday, Mark Zelmer, deputy superintendent of the Office of the Superintendent of Financial Institutions, highlighted the continuing growth in household debt relative to income.

“I would not presume to claim that borrowers are acting irrationally or do not know what they are doing. But, by same token, it is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago,” Mr. Zelmer said in his prepared remarks.

It is clear that the ability of the household sector as a whole to absorb major shocks is less now than it was a decade ago

“Moreover, with interest rates near record low levels, there is not much scope for interest rates in Canada or the United States to fall further – something that helped people weather storms in the past,” he said.

Mr. Zelmer said having well-capitalized lenders might not be enough in times of stress, noting that creditors and investors often lose confidence in financial institutions before they run out of capital.

“Recall that some financial institutions lost access to funding markets in the midst of the global financial crisis even though they were reporting healthy regulatory capital ratios at the time,” he said. “Sitting back and relying on capital is not enough for either financial institutions or prudential supervisors.”

Mr. Zelmer said stress tests, which so far indicate Canadian banks are prepared for a downturn, should not be viewed as overarching “safe harbours” because they are based on models and arbitrary assumptions.

“The results are … comforting. But given the considerable uncertainty associated with stress test results, they are but one input into our decision-making,” Mr. Zelmer said.

“Boards and senior management of financial institutions need to apply judgment in a forward-looking manner and not become too complacent in their capital planning exercises.”

While Canada’s recent housing activity has been far less troubled in recent years than in other markets such as the United States, Mr. Zelmer reminded his audience of the downturn experienced a couple of decades ago.

“Canada has not been immune from significant real estate corrections in the past and the damage they can inflict, as those of you who worked in the early 1980s and 1990s would know,” he said.

“We all have an interest in ensuring housing markets and the financial intermediation supporting them function smoothly.”

Mr. Zelmer noted that consumer debt relative to household income continues to grow at a rate of 4%. And while this is slower than in the past, he noted a small but important group of Canadians who are in a potentially difficult situation “camouflaged” by low interest rates. This group is taking on debt “to make ends meet in the wake of unfortunate life events such as job losses or marriage breakdowns,” he said.

This situation could prove especially tough if house prices don’t remain as strong as expected.

“We believe it makes sense to work with mortgage lenders and insurers to reduce the likelihood of serious problems in the first place by promoting strong governance and risk management controls around mortgage lending and insurance underwriting activities,” Mr. Zelmer said. “This is especially true given residential real estate lending represents more than 60 per cent of bank lending in Canada.”

In his speech, Mr. Zelmer said mortgage underwriting practices have evolved. And while they appear good today, he warned, “past experience suggests that it could become very tempting in the current environment for mortgage lenders and insurers to ease up under the enchanting lull of the siren song of market share.”

‘HGTV effect’ pushes home renovation spending to record $63-billion – Consult with a Vancouver Mortgage Broker

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TORONTO • It could be just the impact of all those home-renovation television programs, but Canadians are fixing up their properties like never before, according to a new report.

“Willingness, at least in part, can be attributed to what is sometimes referred to as the HGTV effect,” Toronto-based real estate consultants Altus Group said, referring to the television station HGTV Canada that launched in 1997 with an emphasis on home renovation. “Many homeowners did not know how badly they really wanted new designer kitchens until then.”

Renovation spending has been rising for 15 straight years and reached a record $63.4-billion in 2013, which accounted for 3.7% of total Canadian gross domestic product, Altus said. More money is being spent on renovation than on all new home construction.

It’s not just leaky roofs that are part of that spending; three of every four renovation dollars are being spent on real home improvement. In real dollar terms, renovation spending jumped 2.7% in 2013.

Altus is predicting about 3% growth in real dollar terms in renovation spending both this year and next as homeowners turn to sprucing up their abodes in the face of record home prices.

“Broad economic and employment growth in 2014 are positive for higher disposable income. This, combined with still robust home sales and continued low interest rates, should support further growth,” Altus said in the report, released Monday.

Canada has a larger housing stock than it did a decade ago, which is partly why renovation spending has more than doubled since the latter 1990s. But Altus estimates only 25% of the growth is due to the greater number of houses, with three quarters of that attributable to people just spending more per housing unit.

In the past five years, renovation per occupied housing unit was about $4,600 per year, up from $2,500 per year from the 1994-1998 period.

Home owners pulled money out of their homes only to put it right back in

Altus said there is a “willingness and ability” to undertake renovation work.

The willingness may come from seeing fancy kitchens on TV, but the ability to pay for these renovations can be attributed to lower interest rates and rising home values that have left homeowners with more equity to tap into for a substantial upgrade.

“Essentially, home owners pulled money out of their homes only to put it right back in,” said Altus, which found mortgage financing and home equity lines of credit were the most common method to get cash for a project.

However, Altus also noted statistics from Bank of Canada show many people have the cash to do projects without borrowing. From 1999-2010, borrowing only accounted for 25% of all renovation work.

Alberta is expected to lead the pack in renovation spending in 2014 and 2015 with the Altus survey indicating a growth in spending of 5% each year in the province.

On a dollar level, Ontario and Quebec still account for most of the activity in the country with two of every three renovation dollars spent in those provinces. Ontario spending is forecast to grow 2.6% next year, just below the 2.9% national average.

Facing limited supply in Canada, home builder buys chunk of U.S. land – Consult with a Vancouver Mortgage Broker

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TARA PERKINS – REAL ESTATE REPORTER- The Globe and Mail