Mysteries of the posted rate
Few people get it, but changes have impact
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 www.ratespy.com. 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 ratespy.com, 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 and has 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.
Bank of Nova Scotia was not available for comment.
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.