In a saturated market it is hard to create new opportunities. Lack of new business drove the lenders in the age-old method of attracting new clients – Undercutting. They started to match rates, even worst – banks started to discount their rates even further. Lenders fell into the vicious cycle of running to the end.
Who Created The Rate Focused Consumers?
There used to be days when mortgage rates were going up and down over time. There had never been a time of such prolonged duration – when rates only went down. The tactics of good days did not work when the time is bad.
Driving the consumer’s attention to rate was a good idea as there were margins and penalties to cover the extra cost. Unfortunately once you get into the undercutting territory your margin will vanish and ever lowering rate will never get you the interest rate differential penalty.
Merger of Variable And Fixed Rate:
As you can see, technically now the rates for 5 year variable and fixed mortgages are almost the same. That means that the risk perspectives of the lenders for short-term and long-term loans are the same. As the gap in risk disappears the yield difference between those two shrinks too. (That is somewhat killing leveraged investing now.)
Over Influenced Risk?
The risk factors of long-term and short term yields are now heavily influenced by all the central banks. Sooner or later the banks will realise the harm being done and they will start to withdraw their claws.
Since the low yield environment is here to stay – the banks will soon realise that undercutting is not the way to go. Few will try to defy the fact and will continue to dig the hole deeper.
Most of the lenders will look into increased cross selling and will higher their fees. The situation is already so dire that some lenders are already (allegedly) crossing some lines.
Is Rate Competition Over?
Nope! Not at all, as long as cheap money is being supplied, there will be appetite for low risk bonds and the rates will stay low. Due to heavy political and economic consequences it is not easy to withdraw the money from the economy quickly. Therefore while there are investors there will be mono-line lenders competing on rates.
When Will Bank of Canada Move?
Not very soon. First of all inflation has to stay above 2% for a while and the job market has to strengthen. Once that happens – BoC will look into raising rate. Till that time we shall be okay.