The unusual offer from Meridian Credit Union, announced Thursday, comes with a few conditions, of course. The bargain-basement rate is only available for an 18-month term and house hunters have to be in such peak, qualifying shape that they’ll be able to withstand the rate shock that hits when the deal is over and the more conventional rate, whatever that is more than a year from now, kicks in.
The savings in the meantime are substantial. Compared to a typical five-year fixed mortgage rate of 2.59 per cent, homeowners would pay about $1,600 less over the 18-month term for every $100,000 borrowed, says Rob McLister of mortgage comparison site ratespy.com which catapulted Meridian to the top of their best rate mortgage list online.
“I had to read it twice,” says McLister with a laugh. “I haven’t seen a deal like this before. It is a truly spectacular rate.”
There are so many conditions attached, and the term so limited, the rate cut wasn’t expected to even raise even an eyebrow in Ottawa where federal officials have been keeping a close watch on Canada’s two hottest — many would say overheated — housing markets, Vancouver and Toronto.
That’s because Meridian is a bit player compared to the likes of BMO which, three years ago, outraged former finance minister Jim Flaherty by dropping the five-year fixed rate to what was then a new low of 2.99 per cent, spurring fears it would prompt a rush of over-extended buyers into the market.
If anything, this low rate offer is more about raising Meridian’s profile and reminding house hunters — first-time buyers in particular — that credit unions are a growing force in the fiercely competitive mortgage lending sector.
“It’s definitely timed to the spring market and to give consumers different options,” says Bill Whyte, chief member services officer for Meridian.
Since 2008, mortgage lending growth has slowed considerably, according to the Canadian Association of Accredited Mortgage Professionals (CAAMP.) It blames much of that on tighter lending rules imposed by Ottawa — such as requiring 20 per cent down payments and reducing amortizations from 40 to 25 years — which have made it considerably more difficult for people to qualify for a mortgage.
At their peak in 2008, mortgage applications were growing by about 12 per cent per year, says Jim Murphy, president of CAAMP. Now they’re growing at just four to five per cent.
If anyone has benefited from Ottawa’s crackdown it’s credit unions which, unlike federally regulated banks, operate under a slightly looser set of rules that have allowed them to take on some buyers now being rejected by the banks. While banks still account for 74.5 per cent of residential mortgage lending, credit unions and Caisses Populaires now stand at 13 per cent.
Over the last three years, Ontario credit unions have averaged annual growth of 10.6 per cent in the residential mortgage sector, says Art Chamberlain, a spokesperson for Central 1, the umbrella organization for credit unions in Ontario and B.C.
In large part Ontario credit unions now account for about $21.7 billion in residential mortgage lending because they’ve become bigger, wealthier and more sophisticated thanks to consolidation. (In 2011, Central 1 had 116 member credit unions. It now has 84, with more consolidations expected.)
Because they are so flush with cash, credit unions have become more aggressive in their rate offerings. As well, they are using mortgage broker networks more to reach first-time buyers and the self-employed, two key buyer groups largely targeted by Ottawa’s tougher rules, says Steve Garganis, a veteran mortgage broker.
“They are quite thorough. You can’t go in as a self-employed person and just write a note saying ‘I make this much money, give me a mortgage.’ But they do have easier qualifying rules.”
The problem is, where a bank will just say Yes or No, credit unions will tend to boost the rate depending on the risk. So it may be extremely difficult for many buyers to qualify for that low of 1.49 per cent, notes Garganis.
“Their challenge is their rates. That’s why you’re not seeing huge volumes of business going there.”