The big banks are in a particularly feisty mood as we head into what promises to be an eventful spring season for home sales.
Bank of Montreal is advertising a highly competitive 3.75-per-cent rate on a five-year fixed-rate mortgage for customers willing to pay off their debt in no more than 25 years. Canadian Imperial Bank of Commerce is offering a combination of 3.99 per cent for five years plus 2 per cent cash back in an attractive offer that's all about prying customers away from its competitors.
Both offers signal the banks are aggressively trying to build market share at a time when home sales are strong and there are signs the usual spring surge is already building. Mortgage broker John Cocomile said the offers also signal a departure from the usual bank practice of making customers negotiate for a good deal.
"For a change, the banks are showing their best hand," said Mr. Cocomile, CEO of GreedyMortgage.com.
CIBC's deal suggests a new front has opened up in the always intense war between lenders in the spring market. The target is the homeowner who wants to renegotiate his or her mortgage early, rather than waiting to renew at higher interest rates in a year or two.
After months of mild fluctuations in fixed-rate mortgage rates, pressure seems to be building for an increase. The five-year Government of Canada bond yield leaped 0.27 of a percentage point last week, and rose a little bit more yesterday. Where the five-year Canada bond yield goes, five-year mortgage rates generally follow.
Mortgage rates have backtracked a few times after rising and it's possible this could happen again. But the latest readings on the economy suggest rates may soon be heading in one direction - up.
The mechanics of its offer aside, CIBC is doing homeowners a favour by prompting them to review their mortgage situation before interest rates start rising.
The bank's offer applies only to people who transfer in mortgages from other lenders. You get a five-year fixed rate of 3.99 per cent, plus 2 per cent of your principal in cash back. If your mortgage balance is more than $400,000, you get 3-per-cent cash back.
The 3.99-per-cent rate for five years is solidly undercut by BMO's 3.75-per-cent offer, and by rates as low as 3.64 to 3.89 from mortgage brokers. But if you're renewing a mortgage, not breaking it to get out early, then CIBC's 2-per-cent cash back can make a difference.
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Robert McLister, a mortgage planner and editor of the Canadian Mortgage Trends blog, crunched some numbers for us and found that CIBC's offer beats the BMO offer if you take all the cash back and use it to pay down your mortgage.
"Assuming a $200,000 mortgage and 25-year amortization, borrowers save $2,571 over five years with CIBC's offer," he wrote.
If you're breaking a mortgage, CIBC's cash back would offset at least part of the penalty you'll have to pay. The penalty may still be prohibitively expensive, however. Suggestion: Ask a CIBC banker to calculate whether the total cost of switching is worth the savings you'll get by breaking an existing mortgage at a higher rate and locking in at 3.99 per cent.
"Our thinking is that there are many existing homeowners out there who have a mortgage not yet up for maturity and, given today's lower rates, they're wondering if they can lock in at a lower rate for five years," said Colette Delaney, senior vice-president of mortgages and lending at CIBC. "The need for mortgage advice has never been as high, given the interest rate environment."
Two further points about CIBC's offer: You must repay a pro-rated amount of cash back if you break the mortgage before maturity, and the 3.99-per-cent rate is guaranteed for only 30 days following your application.
The federal government announced in its budget last week that it will introduce new rules requiring uniform disclosure and calculation of mortgage penalties, which will help make life a little easier in the future for people who want to break a mortgage. For now, you'll have to call your existing lender and ask for the magic number.
If it's big enough to choke on, consider a mortgage manoeuvre called a blend and extend. Your lender will blend your existing rate with a current rate and base a new fixed-rate mortgage on that amount. This isn't an ideal solution, but it does allow you to lock your mortgage down for five years and get a degree of benefit from today's low rates.
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Battle of the mortgage offers: BMO v. CIBC
You're renewing a mortgage and you want to go with a fixed rate for five years to insulate yourself against rising interest rates. Let's compare a $200,000 mortgage amortized over 25 years.
| THE OFFERS | |
| Bank of Montreal | Canadian Imperial Bank of Commerce |
| 5-year fixed-rate mortgage at 3.75% with a maximum amortization of 25 years | 5-year mortgage at 3.99% plus 2% cash back for people switching their mortgage. Assume the $4,000 cash back in this example is used to pay down the principal |
| THE DETAILS | |
| Monthly payment: $1,025.11 | Monthly payment: $1,050.96 |
| Balance after 5 years: $173,342 | Balance after 5 years: $169,220 |
| Advantage: CIBC by $4,122 | |
| Total payments: $61,507 | Total payments: $63,058 |
| Advantage: BMO by $1,551 | |
| Overall advantage in this scenario: CIBC by $2,571 |
Source: Robert McLister, Mortgage Architects
