Spring is always a competitive season for mortgage lenders, but this year is a true standout; lenders small and large (including the Bank of Canada) have cut rates, some to historic lows - five-year fixed options have dipped as low as 2.44% in some provinces, and even Canada's big banks are offering rates below the 3% threshold.
In fact, things have gotten so hot, that lenders are getting creative with their discounts; not content to simply offer the lowest rate, we've seen a few tactics this year that put a new spin on mortgage marketing. Here's a look at what's been introduced in the market so far.
Usually it's brokers and other smaller lenders who push the pricing envelope - but in March, BMO and TD made headlines by cutting their 5-year fixed rates to 2.79% - the lowest ever for large federally-regulated banks (TD has since cut further to 2.74). Not to be outdone, RBC has since countered with a 2.69% rate for the term, labelled as "employee pricing". They aren’t directly advertising that rate, rather it's a word-of-mouth tactic to keep customers coming to them, as competing banks usually only beat posted rates.
CIBC has taken a slightly different tactic with a teaser rate, offering a 1.99% four-year promotion for the first nine months, with the APR going up to 2.83% after.
And, perhaps the lowest of all was credit union Meridian, which introduced an 18-month 1.49% fixed rate in April - the lowest rate ever introduced in Canada, for any term. While no longer available, it offered short-term borrowers very affordable, if temporary, monthly payments.
Mortgage shopping usually goes like this. You find the lowest posted rate, you take that to your lender and ask them to beat it or walk away. But in some cases, these ultra-low rates also come with ultra-strict conditions. For example, some have short closing dates of only 30 days. Others have rigid repayment options. Some lenders stipulate that you can only make a lump sum payment that represents 5% of what you originally borrowed and increase your regular payment by 5%. That will do very little to reduce the interest you’re paying and will not significantly shorten your amortization. In a regular mortgage term, a lender will hold the rate for 120 days and allow a borrower to pay back 20% of the principal original borrower and increase payments by as much as 100% if they can afford to.
When signing up for a mortgage you may want to consider a slightly higher rate, but with standard terms. If you’re lucky enough to see a boost in your income or come into extra cash in the near future, you can easily use it to reduce your mortgage loan. But if your terms are too strict you may not be able to make much of a difference. If for example you originally borrowed $400,000 in a regular five-year fixed you could put an extra $60,000 down in lump sum payments each year and double your regular payments. This would dramatically reduce your amortization and save you thousands in interest payments.
Always buy a house with a 20% down payment to avoid CMHC insurance. As well, to protect yourself from an interest rate hike, pay your mortgage as if its 2 percentage points higher than what the bank offered. So if you have a rate of 2.74%, make payments as if its 4.74%. This more rapidly reduces your principal and it sets you up for an interest rate hike if that’s the case when you go to renew. As a borrower, you don't want your mortgage to be completely no-frills. After all, it is the biggest investment most of us will ever make. Paying a modest premium of 40 bases points is worth it to have flexibility, options and a quality lender. Banks are pulling out all the stops to capture the most customers, use that to your advantage and find the mortgage rate and term that suits you best.