Here are five things you need to know about the mortgage market as the spring home-buying season gets going:
1. That 2.99 per cent Bank of Montreal five-year mortgage isn't quite as good as it sounds.
BMO's recent move to bring its rate below the psychologically significant 3-per-cent mark for fixed-rate five-year mortgages is being treated as a big deal because a similar move a year ago provoked then-finance minister Jim Flaherty to admonish the bank. Joe Oliver, Mr. Flaherty's successor, is taking a more laissez-faire attitude.
What BMO is offering until April 17 is a competitive rate in a mortgage with uncompetitive terms. Most importantly, you can't break this mortgage before it comes up for renewal in five years unless you sell the property, refinance with BMO or do an early renewal into another BMO product. All the usual prepayment penalties would apply in these situations. Veteran mortgage broker Vince Gaetano's summary: "You're handcuffed."
-BMO will hold the rate for 90 days, compared with 120 days at some other lenders.
-You can prepay 10 per cent of the mortgage annually without penalty and increase your payment by 10 per cent a year; 20 per cent is the usual standard for both types of payment increase.
-The skip-a-payment option – a bad idea, admittedly – is not available.
-The maximum amortization period is 25 years; you can typically go up to 30 years if you have a down payment of 20 per cent or more.
2. You can do better than 2.99 per cent.
Mr. Gaetano said late last week that he had a 2.84-per-cent rate on five-year fixed mortgages, but it only applied to clients who had down payments of less than 20 per cent and thus required mortgage default insurance.
The RateSpy.com website confirmed this rate from Mr. Gaetano's firm, Monster Mortgage, while also showing competing brokers and credit unions with rates in the range of 2.83 per cent to 2.94 per cent. Some other rate comparison sites to try include RateSupermarket.ca, RateHub.ca and LowestRates.ca.
3. We will see wide open rate competition this spring.
"I think there will be a full-scale rate war with some mortgage brokers," said Bruce Joseph, a broker with Anthem Mortgage Group in Barrie, Ont. "We've got a huge amount of competition in the market. The market is quite saturated with realtors and brokers."
Mr. Joseph wonders whether we'll see more of a practice called "mortgage rate buydowns," where brokers sacrifice some of their compensation from selling a mortgage in order to get a lower rate for the client. He said some brokerage firms have been aggressive users of buydowns to build sales volume.
Borrowers, there's nothing to stop you from asking for a rate buydown. You just have to recognize that less compensation for a broker may mean less advice and hand-holding.
4. Variable-rate mortgages are looking good.
Rates on variable-rate mortgages are based on the major banks' prime lending rate, which has been stuck at 3 per cent since September, 2010, minus a discount. Mr. Gaetano said discounts have widened out to 0.6 percentage points or more from roughly half that level about eight months ago, and that means a variable rate around 2.4 per cent.
His preference for variable-rate mortgages over the fixed-rate alternative right now is based both on the discounts being offered, and his interest rate outlook. "I don't think rates are going anywhere soon, and getting a variable in the prime minus 0.60 range give you a considerable advantage in hammering down a mortgage."
That said, many of Mr. Gaetano's first-time home buyer clients are going with five-year fixed-rate mortgages, which is smart. In today's expensive housing market, it makes good sense to buy yourself a five-year period to find your financial equilibrium as a homeowner without the risk that your payments will rise.
5. The banks will crush you if you want to break your mortgage.
The penalties that the big banks charge to break a mortgage before it comes up for renewal are abusive. They're a far more deserving target for the federal finance minister than lenders aggressively undercutting each other on mortgage rates.
Get the lowdown on bank mortgage penalties in this column I wrote not too long ago. If there's any chance you might have to break your mortgage – brokers say this is by no means unusual – then consider using a non-big bank lender with a lighter touch on penalties. These same lenders are often good on rates, too.
Follow me on Twitter: @rcarrick
Why low mortgage rates matter
Even small differences in payments can add up.
-you're buying a house at the average national price in February of $406,372
-you have a 5 per cent down payment
-CMHC mortgage insurance costs are added to your principal
(table source: RateSpy.com, Canequity.com)
|Mortgage Example||Bi-weekly accelerated payment||Total Payments Over Five Years|
|2.84 per cent (best rate found online)||$922.41||$119,913|
|2.99 per cent (BMO's special offer)||$937.60||$121,888|
|3.39 per cent (another bank's best special offer)||$978.75||$127,237|
|2.29 per cent (prime minus 0.71; best rate found online)||$867.87||$112,823|
|2.40 per cent (prime minus 0.6; a widely available discount)||$878.63||$114,222|
|2.55 per cent (prime minus 0.45; discounted bank rate)||$893.42||$116,145|