Mortgage Rates

For those of you who have been shopping around for the lowest mortgage rate, your mortgage broker may have offered you a mortgage with a non-standard term. Usually fixed mortgages come in 1, 3, 4, 5, 7, 10 year terms….atleast those are the most common. However, recently a few lenders have been offering mortgages with unusual terms such as 42 months or some other odd number that probably does not make much sense to the average consumer, and possibly not even the average mortgage broker. The one thing most people will notice is the interest rate on these unique term mortgages is quite attractive.

The question remains, why are lenders offering lower mortgage rates on these particular products and why are they venturing outside the normal mortgage terms? I am going to try to explain how these products came about.

First, you need to realize that most mortgages in Canada are securitized. This means after you get your mortgage the lender packages your mortgage with hundreds of others and sells them into the Canadian Mortgage Backed Securities market (CMBS). Units of these mortgage backed securities are then sold off to investors who receive a monthly cashflow from their investment. Your lender still administers your mortgage going forward so this entire process is seamless for you.

Now that you know a bit about what happens to your mortgage after closes we can now discuss the origins of these mortgages with odd maturities. Many times people with a 5 year mortgage do not keep it for a full 5 years. They might move, refinance or sell the property, at which point they pay their penalty and the mortgage closes. This puts the lender in a tight spot. They have sold your mortgage in the CMBS and have an obligation to continue making the interest and principal payments into this investment vehicle until your mortgage was due to end. Now that your mortgage has been closed what do they do? Well, they need to fill that hole with another mortgage with the same remaining term.

For example if your mortgage had 38 months remaining when it was closed, the lender now needs to provide another mortgage with 38 months remaining to satisfy their obligation. Normally, this is an inconvenience for the lender, but they find ways to fund their obligation. However over the last 5 months with interest rates at the lowest level in history, the number of refinances the lenders have been hit with has been excessive. This has resulted in some lenders (mostly non bank lenders) to offer mortgages with terms that fit the profile of the mortgages they have been losing. If we see a lender offering a 38 month mortgage term, it is most likely because they have a significant shortfall in their obligation to the CMBS for mortgages with a 38 month term. Because they are under a bit of pressure to fill this obligation, they offer an attractive interest rate to attract clients as quickly as possible.

I hope you found this explanation easy to follow. Please click here to go to CMHC’s site and learn a bit more about the mortgage backed security market in Canada.

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