Comparison of GIC and Mortgage Rates in Canada - Desklib

Answer 1
Part A
Guaranteed Investment Certificate are Canadian investment which provides a
rate of return which is fixed in nature on the amount of capital invested for a
fixed period of time. The same is equivalent to Certificate of Deposit or Term
deposit. These are issued by Canadian Financial institutions such as bank or
credit union. These certificate represents the loan issued by the investor to the
bank and can be of varied period ranging from 6 months to 5 years. Different
banks have different rate of interest on GIC instrument. The rate of GIC of HSBC
for $1000 to $ 99,999 has been presented as under:
Sl.
No. Particulars Rate of Interest (%)
1. 6 Months 0.30%
2. 1 Year 0.550%
3. 2 Year 0.650%
4. 3 Year 0.850%
5. 4 Year 1.100%
6. 5 Year 1.250%
The date for collection from the website of HSBC is collected on 17th July, 2019
and has been presented for CIBC1 Long-term GIC2.
Mortgages means an agreement by which bank lends money to the investor by
taking borrowers property under control. If the borrower defaults on debt then
the property can be attached for recovery of loan.
1 https://canada.financialadvisory.com/6-month-gic.html
2https://www.cibc.com/en/interest-rates/gic-rates.html
6 Months 1 Year 2 Year 3 Year 4 Year 5 Year
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
GIC-$1000-$99,999
Maturity
Rate

The rate of interest on mortgage for the period has been presented as under:
Sl.
No. Particulars Rate of Interest (%)
1. 6 Months 3.19%
2. 1 Year 3.29%
3. 2 Year 3.49%
4. 3 Year 3.69%
5. 4 Year 4.29%
6. 5 Year 5.04%
The date for date collection from the website of HSBC3 is collected on 17th July,
2019
Part B
The rate of both GIC and mortgages is upward sloping and positive symbolising
that market is positive about the economy. It indicates that market is expecting
a higher interest rate in the future. Thus, investing in long term securities pays a
higher rate of return. Further, in case of mortgages higher time period loan
attract higher rate of interest.
Thus, positive curve symbolise long term rate provide greater return in GIC than
short term. Further, in case of loan too long term mortgages provide better
return to bank.
There is a spread between GIC and the mortgages rate on account of the
following rationales:
3 https://www.hsbc.ca/mortgages/rates/
6 Months 1 Year 2 Year 3 Year 4 Year 5 Year
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
Mortgage Rate of Interest (%)
Maturity
Rate

(a) Bank act as an intermediary which accepts public deposit and lends it to
borrower for return;
(b) Bank has administrative cost which is met from lending and borrowing which
accounts for more than 70% of the revenue of the business;
(c) The opportunity cost of capital also results in gap as bank has to provide
interest rate to the lender and has to meet its expenses too.
(d) Liquidity is higher in case of GIC than in case of Mortgages. Hence, GIC and
Mortgages gap is present;
(e) Risk is higher in mortgage than in GIC as bank are cash rich solid institutions;
(f) Matching of asset and liability requires bank to lend at a higher rate in order
to match the asset and liability side of balance sheet.
Answer 2
There are many mortgage lender in Canada. Some of the prominent mortgage
lenders are F.N.B Corporation, Scotia Bank, TD Canada trust etc.
Part A
I have done a google research to find the top companies in Canada providing the
service and then applied filter to contact the bank. The bank are quick in
responding and provide very quick solution to the customer once you contact
them.
Under conventional model mortgage, TD Canada trust provides 80% LTV with
20% down payment and rest funded by Bank. The said mortgage is generally for
a single family dwelling as duly highlighted in their website.
The LTV4 ratio or Loan to Value Ratio symbolise the maximum amount of loan
that shall be disbursed by the bank considering the value of the property. In the
case of TDD Trust i.e. 80% of the value of property.
Under conventional model mortgage, FNB Corporation provides 85% LTV with
15% down payment and rest funded by Bank. The said mortgage is generally for
a single family dwelling as duly highlighted in their website5.
Yes, there are difference as the LTV ratio changes on the nature of property. The
highest LTV is provided for the residential property. Further, the LTV also varies
on the basis of the credit rating of the borrower, location of the property etc.
Part B
Yes, many times in Canada the lenders do carry an appraisal to ascertain the
true value of the property when they doubt that the value of the paper does not
represent the true value of the property. Further, the appraisal is carries out to
safeguard the amount of money lent and to create a buffer to prevent erosion of
loan on account of drastic fall in the value of property. Further, the lending value
is generally near 80% of the value of property. In case the same reaches near
4 https://www.td.com/ca/en/personal-banking/products/mortgages/first-time-
home-buyer/down-payments/
5https://www.fnb-online.com/borrow/personal-loans/home-equity-loan

about 90% of the value of the property, it may cause issue for the bank. Also, the
crisis in 2008 emphasizes on appraisal.
Part C
Currently, the maximum the gross debt service ratio applied is 35% of the gross
family income. This ratio defines the percentage of the gross income of the
borrower which are generally used for covering the payment of housing cost like
utility bill, mortgages, taxes etc6. The present threshold is set at 35%7.
Yes, the rate varies depending on the credit rating of the borrower and the
financial strength of the books of the borrower. The higher the strength and good
the books are the higher the rate of gross debt service ratio shall be.
Part D
The following elements are included in the Gross debt service ratio computation:
(a) Monthly Housing Costs encompassing principal, interest and heat;
(b) 50% of Condo fees;
(c) Gross monthly income.
Part E
The total debt service ratio represents the percentage of your income that will
be required to cover all the debts. The formula for computation of Total debt
service is similar to the computation of the gross debt service. Further, in the
total debt service ratio all your debts taken into consideration for analysis. The
debt encompass car loan, credit car loan, alimony etc. The industry standard for
the ratio is approximately 42%.
For computing the ratio add all debt related cost and divide the same with
monthly income.
The other steps that lenders take to understand the credit worthiness of the
borrower encompass the following:
(a) Total Expense Ratio;
(b) Living Standards and habits;
(c) Savings;
(d) Financial soundness;
Part F
Discount Rates are offered generally in the following circumstances:
(a) Customer Loyalty;
(b) Strong Financials;
6 https://www.superbrokers.ca/library/glossary/terms/gross_debt_service.php
7https://www.whichmortgage.ca/article/what-are-tds-gds-and-ltv-ratios-
174913.aspx