HSBC made headlines Friday when it unveiled Canada’s lowest-ever mortgage rate — a 0.99% 5-year variable for default-insured borrowers.
The rate attracted considerable attention from rate shoppers and non-rate shoppers alike. What homeowner wouldn’t be intrigued by an interest rate under 1.00%?
Consider that at the start of the year, the lowest nationally available 5-year variable rates were around 2.64%. That’s a 165-basis point swing in less than a year.
Prior to HSBC’s announcement last week, the lowest rate available in Canada was 1.19% for a 1-year fixed, available from select online brokers.
Is HSBC’s 0.99% Rate a Good Fit?
On the surface, HSBC’s record-breaking offer seems like a steal. It works out to a monthly payment of just $376 per $100,000 of mortgage, or $1,079 on the average $286,669 mortgage balance in Canada.
This is the lowest payments have ever been in this country.
So, what’s the catch?
Like most mortgage rate options, there are pros and there are cons. First off, you have to qualify. HSBC’s marquee 0.99% rate is not available if you:
- Are not default-insured by CMHC (common for people buying a home with less than a 20% down payment)
- Have weak credit
- Have insufficient provable income
- Have unstable employment
- Have more than 35% of your income going towards housing costs
- Have more than 42% of your income going towards monthly debt and housing obligations in general
- Need an amortization over 25 years
- Are refinancing
- Need a mortgage on a non-owner occupied rental property
- Do not have a marketable property.
Here are more of the positives and negatives of this 0.99% offer:
- It’s for high-ratio mortgages only. In other words, you’re only eligible if you’ll be putting less than 20% down on your home purchase. Only about 20% of mortgage applications are for high-ratio mortgages, the majority of them being first-time buyers. That leaves the large majority of mortgage shoppers ineligible (though HSBC also unveiled a 1.34% variable rate for uninsured purchases and switches).
- Variable rates are currently less popular. With fixed rates at historic lows, more shoppers have been opting for the long-term stability of 5-year fixed mortgages as opposed to variable, or “floating” rates. Currently, only about a quarter of mortgage shoppers are in the market for a variable rate. Combining that with the percentage of high-ratio purchases, that means HSBC’s blockbuster rate is realistically only going to apply to roughly 5% of total mortgage shoppers.
- Variable rates will likely rise. Since this is a floating rate that will fluctuate according to future moves in Canada’s prime rate, your 0.99% rate today can quickly become 1.74% after just three Bank of Canada rate hikes (or a total rate movement of 75 basis points). If that could cause you some sleepless nights or if higher monthly payments would put pressure on your budget, a variable rate—even one under 1%—may not be for you. That’s particularly true given 5-year fixed rates are just 1.39% at the moment.
- The rate could fall further. While unlikely, variable rates could technically drop more. Should the BoC bring its overnight rate down to zero (from 0.25% currently), and if prime rate were to fall equally, you could potentially end up with a 0.74% mortgage rate, akin to winning a mortgage lottery. According to Westpac, there’s currently a 15% chance of Canada’s key lending rate falling further. Although there’s no guarantee a cut would be a full quarter-point.
- Lower prepayment penalties. This is one of the big benefits of a variable rate, particularly for those unsure what their future has in store and whether they plan to hold their mortgage for the full five years. Should you need to break the mortgage early, you’ll face just a three months’ interest penalty. Compare that to typical fixed mortgage rate penalties that can soar well into five figures.
- Upfront savings. While prime rate may climb over the next two or four years as the economic recovery builds momentum, you’ll nonetheless have enjoyed up to two, maybe even three years of rock-bottom interest costs. That can cancel out some or all of the impact from future higher interest rates (depending on how high they go, of course).
For those who are making a down payment of less than 20%, and can handle potential rate volatility in a few years, HSBC’s new rate offer could be a steal.
Perhaps it’ll even be a rate you brag about to your grandkids one day, much like your parents remind you of the 15%+ interest rates they paid “when they were your age.”