Rate pricing: Canada vs. the U.S.
Sometimes you just don’t know how good or bad you have it.
Take the mortgage business, for example. When it comes to mortgage pricing, Canada is a unique animal compared to many other countries, including the United States.
Being married to a U.S. mortgage broker has made that all too clear for this author. And Tuesday, August 2, was a case in point.
Frenetic rate updates
While Canadian brokers watch the 5-year yield for hints on fixed-rate direction, in the U.S. the benchmark is the 10-year Treasury.
When yields are moving meaningfully in Canada, a lender might send a rate update once this week, or perhaps twice if the moves are large enough.
When yields are moving in the U.S., even if it’s a tiny five-basis-point blip, lenders adjust rates on the double.
U.S. brokers can sometimes get three to four rate updates (from one lender) in one day. This happened on Tuesday after the Federal Reserve clarified that there’s much more policy tightening to come—and that people shouldn’t bet on rate cuts next year.
One U.S. wholesale lender I watch lifted rates four times by the end of the day. Some of the others, three times. And most others at least twice.
In Canada, where I’ve been watching rates for over 15 years, I can count on one hand the number of times I remember a lender bumping up rates twice in one day.
It rarely happens. And that’s a good thing if you’re a broker or customer.
Imagine phoning a client who’s panicking about rates and anxious to lock a rate in. Yesterday, that could have taken three phone calls:
- Call #1 (9:30 a.m. ET): “Hello, Mr. Customer, we can lock in a 30-year fixed for you at 4.375% with no points.”
- Call #2 (12 p.m. ET): “Hello, Mr. Customer, so sorry to say, yields are flying and the best rate with no points is now 4.45%.”
- Call #3 (3:30 p.m. ET): “Hi, Mr. Customer, Me again. I really hate to do this, but rates are up again, the best 30-year fixed is now 4.50%.”
By the way, U.S. lenders price to three decimal points instead of two (e.g., 4.375%), which is kind of funky from a Canadian’s perspective.
Now, there are ways for U.S. brokers to manage fast-changing rates, but they’re not ideal, and that’s beyond the scope of this story.
Suffice it to say, anyone can quote a rate. That’s the easy part. But rates in the U.S. move almost immediately with yields. To lock in a rate, you first need a customer application. And U.S. applications are more extensive than Canadian apps. So it takes time to get the customer’s app and rates can move in the interim.
And even if you get an app quickly and want to lock in, U.S. brokers generally prepare a government-mandated “Loan Estimate” before locking in, and that takes more time.
Loan estimates must be sent to clients within three days of application and signed, as required by the U.S. Truth in Lending Act. When rates change on the same day, as they did yesterday, you often have to redo the loan estimate and shoot it back to the client.
The Canadian advantage
The point is, when rates zoom higher at most lenders in Canada, brokers (especially status brokers) usually get a heads up. Something like, “Hi, Sally, rates are going up at midnight, get your deals in.”
In the U.S., that’s an exception, not the rule.
In Canada, we often complain about things like lenders not lowering rates fast enough, not having economical terms over five years, and so on.
But we also have endless advantages over our U.S. neighbours. That same rate stickiness we complain about when yields are dropping provides an important benefit when yields are skyrocketing. Time.
Clients generally don’t have to rush like thieves to apply. And there’s no need to get bogged down early in the process with government disclosures.
Oh yeah, and rate holds in the U.S. are 30 days. Ask for 120 days and a broker might laugh at you.