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The big banks are masterly in how they attract attention to their mortgage rate cuts.

Don't buy the hype. For the best mortgage deals as defined by low rates and favourable terms, see a mortgage broker. You may still end up doing business with your bank, but failing to at least consult a broker is borderline personal-finance negligence.

A sign of spring's approach in Canada is a bank making what looks like bold mortgage moves to the uninformed. This week, Bank of Montreal and Toronto-Dominion Bank announced five-year fixed-rate mortgages at 2.79 per cent, while Canadian Imperial Bank of Commerce has been offering a special introductory rate of 1.99 per cent on the first nine months of some fixed-rate mortgages.

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Mortgage broker David Larock says the vast majority of mortgages he's arranged lately are five-year fixed, and the rates range from 2.54 per cent to 2.69 per cent. In addition to lower rates, they have comparatively light penalties if you have to break your mortgage before its maturity date. "The penalties are a fraction of what the major banks charge," Mr. Larock said.

Besides rates and penalties, some of the key variables in choosing a mortgage are prepayment privileges, or how much of the mortgage principal you can pay down every year without incurring a cost, and the length of time the lender will hold a mortgage rate for you. Mr. Larock said the mortgages he's set up lately all have rate holds of 90 to 120 days, and they mostly let clients prepay 20 per cent annually. These terms are similar to what the banks offer, so you're not giving up anything in using a broker.

The Canadian Association of Accredited Mortgage Professionals says 30 per cent of outstanding mortgages were arranged by mortgage brokers in 2014, up from 23 per cent in 2009. Banks had a 55-per-cent share last year, with other lenders claiming the last 15 per cent. Bank dominance is slipping, but slowly. By creating an illusion of daring competitiveness, the banks keep customers coming back.

Here's what's really going on in bank mortgage lending today. According to Robert McLister, mortgage planner at intelliMortgage Inc. and founder of, banks have for weeks been offering rates lower than 2.79 per cent for clients with good credit histories. "You'll never see a bank advertising its lowest discretionary mortgage rate," he said. "That's not how they maximize profits."

As a rough guideline, Mr. McLister says a rate in the 2.6-per-cent range should be doable if you're a creditworthy bank customer. He says standard mortgages from the "monoline" mortgage lenders that brokers work with are in the 2.59- to 2.64-per-cent range, and that slightly lower rates can be had through no-frills mortgages with restrictive terms.

Mortgage prepayment penalties are where alternative lenders really crush the big banks. I wrote about this in a column a little more than a year ago (read it here online: The hidden trap of mortgage penalties at the big banks). In short, lenders calculate these penalties on fixed-rate mortgages as the greater of three months' interest or what's known as an interest rate differential, or IRD.

The idea behind the IRD is to compensate a lender for the interest lost when you pay out a mortgage early. Lenders have different ways of calculating the IRD, but you should expect penalties to be as much as three to four times higher at the banks than competing lenders.

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Mr. Larock, the mortgage broker, says he's seen figures suggesting about one-third of mortgage holders get out of their loan early. However, he thinks these numbers may be skewed by the large numbers of people who have broken mortgages to capitalize on falling mortgage rates in the past few years. Generally, he figures about 10 to 15 per cent of people break their mortgages and therefore incur penalties.

If you're dead certain you'll stay in a five-year mortgage for five years, maybe your bank's best deal on rates will suffice. If you want to keep your options open and possibly get a better rate, check out a mortgage broker.

It's worth noting that Mr. Larock does about 20 per cent of his business with banks, mainly in cases where clients want a mortgage and a home-equity line of credit. However, he warns these people that the prepayment penalties can box them in for the term of their mortgage. "I tell them, as you sign I want you in your mind to hear the sound of a giant iron gate slamming shut."

Mortgage market survey

These are currently the best advertised rates for a full-featured five-year fixed mortgage with a 90+ day rate hold:

  • Advertised at major banks: 2.79%
  • Credit unions: 2.59% to 2.69% (e.g. Slovenia CU at 2.59%)
  • Monoline (mortgage only) lenders: 2.74% (e.g. Canadiana Financial)
  • Mortgage brokers: 2.59% to 2.69% (multiple reputable brokers)

Note: Brokers and lenders may sell at lower rates on a discretionary basis. Shorter rate holds typically save you at least 0.1 of a percentage point.

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