For the first time in Canadian history, a mortgage can be had with an interest rate below 1 per cent.
HSBC is officially the first lender to break that barrier, offering a five-year variable rate of 0.99 per cent, something that will probably have people who had 20-per-cent mortgages in the 1980s shaking their heads.
The offer applies to default-insured purchases only. But the bank is also advertising record-low uninsured five-year rates.
It’s just the latest captivating rate from a lender that’s been tormenting its banking competitors with below-market rates for more than three years.
HSBC’s headline-making rates go back to mid-2017 when it launched a new online-focused model. Its model uses mortgages as a way into your wallet so the bank can sell you other financial products. That’s how it can justify these eye-popping rates.
Admittedly, 0.99 per cent was a rate that even the bank didn’t expect.
“I wouldn’t have thought we’d have a competitive market in December,” said Jonathan Bundle, head of products, wealth and personal banking at HSBC Bank Canada. “December is usually very sleepy [in the mortgage business] and normally it stays quite slow into January.”
But he says “massive home sales in November,” relentless mortgage competition, ultralow funding costs, a less certain 2021 and a chance to make history all combined to make this the right time to test this rate.
A rate under 1 per cent raises some important questions, chief among them:
Is it worth it?
A sub-1-per-cent rate makes the fixed versus variable decision less clear-cut.
Whereas on Thursday the lowest fixed and variable rates were just 15 basis points apart, that gap has widened significantly on Friday. The lowest nationally available variable is now 40 basis points below the cheapest five-year fixed. (There are 100 basis points in a percentage point.)
And when that fixed-variable “spread” grows meaningfully wider, the odds of success shift increasingly toward variable, all else equal.
Rate predictions are for people who like to be wrong a lot, but you can still run logical scenarios to gauge your risk/reward. You might hypothesize, for example, that the Bank of Canada hikes rates in 2023 as it’s presently forecasting. It would not be totally unreasonable to then assume it hikes rates only 75 basis points or so – as it did after the last recession. In that scenario, a 0.99 per cent variable rate would save you more than a comparable five-year fixed rate.
If you’re an inflation hawk and feel inflation and rates are headed a percentage point higher, or more, today’s record-low five-year fixed rates should serve you well. Just remember that fixed rates have much bigger penalties than variable rates if you break them early. The average five-year term lasts only 3.8 years, give or take, before the borrower breaks or renegotiates their mortgage.
HSBC’s rates will unquestionably force other lenders to be more competitive, which might be the best news of all for mortgage shoppers.
More deal details
Here are nine things you should know about HSBC’s new rates:
1. Its marquis 0.99 per cent offer requires default insurance, meaning you have to pay an insurance premium. That’s normal for anyone buying a home with less than a 20 per cent down payment.
2. Several of the bank’s other offers are also record lows for lender-advertised rates, including:
- 1.39 per cent for default-insured five-year fixed purchases
- 1.64 per cent for uninsured five-year fixed refinances
- 1.34 per cent for uninsured five-year variable refinances
3. There’s no deadline to apply. How long these deals stick around depends on the bank’s funding costs, volumes and targets.
4. To get 0.99 per cent you must pass the stress test by proving you can afford a payment at 4.79 per cent. That’s a massive 380 basis points higher than the actual rate you’ll pay, a record in its own right. This is reflective of the fact the Department of Finance has still not reduced the minimum stress test rate to match the huge reduction in market rates, which it promised to do before the pandemic hit.
5. HSBC is the only lender that: a) allows you out of a five-year variable rate without penalty after just three years, and b) lets you lock your variable mortgage into one of the country’s lowest five-year fixed rates – the bank’s best uninsured rate, which is transparently advertised on its website.
6. Its variable-rate prepayment penalty is a simply three-months’ interest, but it’s got a potentially expensive big-bank style penalty on its five-year fixed rates. If want to lock in and may need to change your mortgage before five years, look for a “fair penalty lender” instead. More favourable penalties can easily save you the equivalent of 0.25 to 0.50 percentage points on the interest rate.
7. The bank is offering $1,000 cash if you’ve got 20 per cent equity and your mortgage is for a new purchase or a switch from another lender, enough to cover most of your legal and appraisal fees.
8. To get this deal you can apply online, visit any HSBC branch or use select Dominion Lending Centre brokers (in Ontario only).
9. If you jump on this rate, do not plan to close quickly – that is, in under 30 days. My guess is that the bank will be a “little” busy.
Robert McLister is a founder of RateSpy.com and intelliMortgage, and mortgage editor at RATESDOTCA. You can follow him on Twitter at @RateSpy.