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Saturday, October 15th, 2016

RBC’s Step Forward – Ask a Vancouver Mortgage Broker

RBC‘s Step Forward

Adil Virani Vancouver Mortgage BrokerDo you know what largely determines your mortgage rate? It’s the cost to your lender of raising capital in the first place. This is what makes recent activity on the part of RBC so noteworthy.

RBC used covered bonds to raise $2.5 billion on September 12th of this year. Some of this will be used to fund Vancouver home mortgages.

Covered bonds are surprisingly new to Canadian financial institutions. This is despite the fact that they’ve been used in Europe for several hundred years. Both a pool of mortgages and the issuing financial institution‘s credit  are what backs covered bonds. This means that if the issuer/lender becomes insolvent, investors can still recoup their losses through the product’s underlying asset; in this case, mortgages. Covered bonds are sold by banks in Canada in order to raise funds for their mortgage lending divisions involved in real estate financing.

RBC’s actions were particularly noteworthy because the covered bonds were the first of their kind in the world to be SEC-registered. This potentially allows everyday Joes (and investors)  to get their hands on such investments. This massive pool of potential buyers increases liquidity and makes the issuing of covered bonds cheaper.

But why should anyone care? The reason in theory is that, funding costs saved by RBC can be passed on to those requiring real estate financing in the form of lower mortgage rates. The end result, is that customers should have access to increasingly low mortgage rates.

The real change though it’s hard to predict. But even savings of only a few basis points could shave a few hundred dollars off a quarter million dollar mortgage during a five-year period. These are not large savings, but savings nonetheless, especially when applied to large Vancouver home mortgages.

New rules related to covered bonds were released by the government earlier this year. One of these rules prevents banks from using a certain types of collateral, insured mortgages. This move by the government has increased the cost of raising capital for banks, and delayed some of their plans for using covered bonds going forward.  This has also delayed the benefits that would have been bestowed on low mortgage rates.

This recent issue by RBC was the first issue in several months that utilized covered bonds.

Although it would not be an easy process, banks could also potentially sell these SEC-registered bonds into public markets in the US.

Luckily for other financial institutions involved in real estate financing, the precedent set by RBC’s issue is a step in the direction many would like to go. Going forward, the SEC approval process should become more efficient and have the effect of lowering the cost of obtaining capital for the Big 6 banks. Contact a trusted mortgage broker in Vancouver for more information on how covered bonds might affect your future.

 

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