Mortgage rates have become far more competitive compared to the start of the year. But not all mortgage rates.

If you're the type of borrower who can get approved anywhere (i.e., creditworthy), you’ll find that rate discounts are better today than on January 1.

On the other hand, if you can’t prove your income, your credit is weak or your debt ratios are sky-high, the picture isn't as bright. Discounts for these borrowers have improved much less since January 1, if at all.

The Numbers

As of yesterday, the markup on the lowest nationally available five-year fixed rate for someone with excellent credit and provable income had shrunk (i.e., improved for borrowers) by 33 bps since January 1.

Note: This gets way into the weeds, but just in case you're interested, "markup" refers to how much above the lender's base cost it sells a mortgage for, holding fees constant. Base cost is the respective swap rate for prime mortgages and the respective GIC rate for non-prime mortgages. If a non-prime lender sells a one-year fixed mortgage, for example, odds are it was funded by a one-year GIC. So its one-year mortgage rate minus that GIC cost is its gross "margin" in this case.

Even if you look at prime one-year fixed rates, markups have shrunk 19 bps since January 1. Or, in other words, discounts have improved 19 bps.

Essentially, mainstream mortgage lenders (referred to as "A" lenders in the business) have become more aggressive on pricing this year. Reasons include a slower prime mortgage market (due in part to regulation), process automation and greater online competition, among others.

Meanwhile, average rate markups at below-prime (a.k.a. “alt-A”) lenders have gone the other way. They've increased an average of 19 bps among the six alternative broker-channel lenders we track. (Six lenders is somewhat anecdotal, but it's very hard to track non-prime rates since they're not published as widely as prime rates.)

Clearly, non-prime borrowers haven't benefited from this year's rate reductions as much as well-qualified homeowners.

A Theory on Why

Prime borrowers are being rewarded with much better deals in 2019 while non-prime mortgagors aren't. The reason for this is not intuitive...unless you're in the business, perhaps.

Good old supply and demand explains much of it. Prime mortgage growth this year has been almost half of what it was a few years back. Many lenders must maintain market share and pricing is their lever to do that.

Meanwhile, non-prime lending remains lively. With the 2018 stress test and stricter rules on income documentation—both of which make it harder to get approved for an uninsured mortgage—borrowers have gravitated to more flexible lending options. That is, lenders that have lower credit score requirements, allow higher debt-ratio limits and/or don’t require the same rigorous proof of income.

Added regulation and demand for more liberal lending has given non-prime lenders less reason to discount their rates. But that's not the whole story. At the start of the year, margins for alt-A mortgages were below average. Today's recapturing of profit is partly a reversion to the mean, says one lender we spoke with today. Credit risk, which has also inched higher since the start of the year, is also a factor.

Any way you slice it, less creditworthy borrowers got a one-two punch in 2019. Not only were many shut out by prime mortgage lenders, but (despite falling rates overall) they were compelled to pay more, relative to lenders' true cost of funds that is.

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by Kanetix Ltd.

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