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How is a sub 2% mortgage rate even possible?

Posted on May 20, 2014 in Mortgage Market Updates and News

John Greenwood and Garry Marr
Financial Post

So how is it possible for Investors Group to be offering 1.99% mortgages, the lowest advertised rate in living memory?

One of the biggest reasons is that funding costs for companies like Investors Group are at record lows. If the offer seems generous, that’s because they’re able to fund themselves at an even more generous rate.

The other thing is that this is a variable rate, so in other words it can change very quickly, theoretically in a day. And remember that the typical mortgage amortizes over 20 years or more, so potential purchasers of this product need to ask themselves some hard questions before signing up.

But perhaps the real question is, why is Investors Group doing this. One word: Advertising. They’re a big name in wealth management but not so much in home loans, so if the company is hoping to spread the word on that front, what better way than to come out with a product boasting the lowest rate in recent history.

Observers say the company is a bit player in consumer mortgages and they don’t expect the banks, which dominate consumer lending, to try to beat the offer.

Investors is a distributor of retail banking products for National Bank of Canada but the mortgage business is not part of that, according to Peter Veselinovich, vice-president of banking and mortgages.

Last year the company originated in excess of $2-billion of home loans, putting it at about 1% of the total mortgage market in Canada.

Peter Veselinovich, vice-president of banking and mortgages said the latest offer came about after the company “secured a block of proprietary funds.”

Mr. Veselinovich declined to say how the funding was acquired or how much has been allocated. “It’s money that’s available to us and that we are able to use,” he said.

Banks and other mortgage originators are able to reduce their funding costs by insuring the loans through the Canada Mortgage and Housing Corp. and selling the loans off as bonds.

Mr. Veselinovich said he expects that a chunk of the mortgages resulting from its offer will made to borrowers unable to make a minimum 20% down-payment and who will therefore require mortgage insurance, but he said the larger portion will be conventional loans.


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